ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of government. We enable our clients to realize cost and energy savings by providing a wide range of specialized services. We assist our clients with a broad range of complementary services relating to:
|
·
|
|
Energy Efficiency and Sustainability;
|
|
·
|
|
Engineering, Construction Management and Planning;
|
|
·
|
|
Economic and Financial Consulting; and
|
|
·
|
|
National Preparedness and Interoperability.
|
We operate our business through a nationwide network of offices in Arizona, California, Connecticut, Colorado, Florida, Illinois, Kansas, Nevada, New Jersey, New York, Ohio, Oregon, Texas, Utah, Washington and Washington, DC. As of December 29, 2017, we had 882 employees which includes licensed engineers and other professionals.
We seek to establish close working relationships with our clients and expand the breadth and depth of the services we provide to them over time. Our business with public and private utilities is concentrated primarily in New York and California, but we also have business with utilities in other states. We currently serve more than 25 major utility customers across the country. Our business with public agencies is concentrated in New York and California. We provide services to many of the cities and counties in California. We also serve special districts, school districts, a range of public agencies and private industry.
We were founded in 1964 and Willdan Group, Inc., a Delaware corporation, was formed in 2006 to serve as our holding company. Historically, our clients were public agencies in communities with populations ranging from 10,000 to 300,000 people. We believe communities of this size are underserved by large outsourcing companies that tend to focus on securing large federal and state projects and private sector projects. Since expanding into energy efficiency services, our client base has grown to include investor-owned and other public utilities as well as substantial energy users in government and business.
We consist of a group of wholly owned companies that operate within the following segments for financial reporting purposes:
|
·
|
|
Energy Efficiency Services
.
Our Energy Efficiency Services segment consists of the business of our subsidiary WES which offers energy efficiency and sustainability consulting services to utilities, public agencies and private industry under a variety of business names, including Willdan Energy Solutions, Abacus Resource Management, 360 Energy Engineers, Genesys Engineering and Integral Analytics. This segment is currently our largest segment based on contract revenue, representing approximately 73% and 68% of our consolidated contract revenue for fiscal years 2017 and 2016, respectively.
|
|
·
|
|
Engineering Services
.
Our Engineering Services segment includes the operations of our subsidiaries, Willdan Engineering, Willdan Infrastructure and Public Agency Resources. Willdan Engineering provides civil engineering‑related construction management, building and safety, city engineering, city planning, geotechnical/material testing and other engineering consulting services to our clients. Willdan Infrastructure, which was launched in fiscal year 2013, provides engineering services to larger rail, port, water, mining and other civil engineering projects. Public Agency Resources primarily provides staffing to Willdan Engineering. Contract revenue for the Engineering Services segment represented approximately 21% and 25% of our consolidated contract revenue for fiscal years 2017 and 2016, respectively.
|
|
·
|
|
Public Finance Services
.
Our Public Finance Services segment consists of the business of our subsidiary, Willdan Financial Services, which offers economic and financial consulting services to public agencies. Contract revenue for the Public Finance Services segment represented approximately 5% and 6% of our consolidated contract revenue for fiscal years 2017 and 2016, respectively.
|
|
·
|
|
Homeland Security Services
.
Our Homeland Security Services segment consists of the business of our subsidiary, Willdan Homeland Solutions, which offers national preparedness and interoperability services and communications and technology solutions. Contract revenue for our Homeland Security Services segment represented approximately 1% of our consolidated contract revenue for each of fiscal year 2017 and 2016.
|
Acquisition of Integral Analytics
On July 28, 2017, we and our wholly-owned subsidiary WES acquired all of the outstanding shares of Integral Analytics, Inc., a data analytics and software company, pursuant to the Stock Purchase Agreement, dated July 28, 2017, by and among us, WES, Integral Analytics, the stockholders of Integral Analytics and the Sellers’ Representative (as defined therein).
WES will pay the stockholders of Integral Analytics a maximum purchase price of $30.0 million, consisting of (i) $15.0 million in cash paid at closing (subject to certain post-closing tangible net asset value adjustments), (ii) 90,611 shares of our common stock, issued at closing, equaling $3.0 million, calculated based on the volume-weighted average price of shares of our common stock for the ten trading days immediately prior to, but not including, the closing date of the acquisition of Integral Analytics and (iii) up to $12.0 million in cash for a percentage of sales attributable to the business of Integral Analytics during the three years after the closing date of the Integral Analytics acquisition, as more fully described below (such potential payments of up to $12.0 million, being referred to as “Earn-Out Payments” and $12.0 million in respect thereof, being referred to as the “Maximum Payout”). We used cash on hand for the $15.0 million cash payment paid at closing.
The size of the Earn-Out Payments to be paid will be determined based on two factors. First, the stockholders of Integral Analytics will receive 2% of gross contracted revenue for new work sold by us in close collaboration with Integral Analytics during the three years following the closing date of the acquisition of Integral Analytics (the “Earn-Out Period”). Second, the stockholders of Integral Analytics will receive 20% of the gross contracted revenue specified in each executed and/or effective software licensing agreement entered into by us or one of our affiliates that contains pricing either equal to or greater than standard pricing of software offered for licensing by Integral Analytics during the Earn-Out Period. The amounts due to the stockholders of Integral Analytics pursuant to these two factors will in no event, individually or in the aggregate, exceed the Maximum Payout. Earn-Out Payments will be made in quarterly installments for each year of the Earn-Out Period. For the purposes of both of these factors, credit will be given to Integral Analytics for the gross contracted revenue in the quarter in which the contract/license is executed, regardless of when the receipt of payment thereunder is expected. The amount of gross contracted revenue for contracts with unfunded ceilings or of an indeterminate contractual value will be mutually agreed upon. Further, in the event of a change of control of WES during the Earn-Out Period, any then-unpaid amount of the Maximum Payout will be paid promptly to the stockholders of Integral Analytics, even if such Earn-Out Payments have not been earned at that time. We have agreed to certain covenants regarding the operation of Integral Analytics during the Earn-Out Period, of which a violation by us could result in damages being paid to the stockholders of Integral Analytics in respect of the Earn-Out. In addition, the Earn-Out Payments will be subject to certain subordination provisions in favor of BMO Harris Bank, N.A. (“BMO”), our senior secured lender.
WES has also established a bonus pool for the employees of Integral Analytics to be paid based on Integral Analytics’ performance against certain targets.
Components of Revenue and Expense
Contract Revenue
We generally provide our services under contracts, purchase orders or retainer letters. The agreements we enter into with our clients typically incorporate one of four principal types of pricing provisions: time-and-materials, unit-based, fixed price and service-related contracts. Revenue on our time-and-materials and unit-based contracts are recognized as the work is performed in accordance with specific terms of the contract. Approximately 19% of our contracts are time-and-materials contracts and approximately 32% of our contracts are unit-based contracts. Some of these contracts include maximum contract prices, but contract maximums are often adjusted to reflect the level of effort to achieve client objectives and thus the majority of these contracts are not expected to exceed the maximum. Contract revenue on our fixed price contracts is determined on the percentage of completion method based generally on the ratio of direct costs incurred to date to estimated total direct costs at completion. Many of our fixed price contracts involve a high degree of subcontracted fixed price effort and are relatively short in duration, thereby lowering the risks of not properly estimating the percent complete. Our service-related contracts, including operations and maintenance services and a variety of technical assistance services, are accounted for over the period of performance, in proportion to the cost of performance.
Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimate indicates a loss, such loss is recognized currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in dispute are evaluated as claims. Costs related to un‑priced change orders are expensed when incurred and recognition of the related contract revenue is based on an evaluation of the probability of recovery of the costs. Estimated profit is recognized for un‑priced change orders if realization of the expected price of the change order is probable.
Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability on that contract. In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of the transaction. Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause. While we have a large volume of contracts, the renewal, termination or modification of a contract, in particular contracts with Consolidated Edison and DASNY, may have a material effect on our consolidated operations.
Some of our contracts include certain performance guarantees, such as a guaranteed energy saving quantity. Such guarantees are generally measured upon completion of a project. In the event that the measured performance level is less than the guaranteed level, any resulting financial penalty, including any additional work that may be required to fulfill the guarantee, is estimated and charged to direct expenses in the current period. We have not experienced any significant costs under such guarantees.
Direct Costs of Contract Revenue
Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that have been incurred in connection with revenue producing projects. Direct costs of contract revenue also include material costs, subcontractor services, equipment and other expenses that are incurred in connection with revenue producing projects. Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts. Such costs are included in general and administrative expenses. Additionally, payroll taxes, bonuses and employee benefit costs for all of our personnel are included in general and administrative expenses since no allocation of these costs is made to direct costs of contract revenue.
Other companies may classify as direct costs of contract revenue some of the costs that we classify as general and administrative costs. We expense direct costs of contract revenue when incurred.
General and Administrative Expenses
General and administrative expenses include the costs of the marketing and support staffs, other marketing expenses, management and administrative personnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs of contract revenue for those employees who provide our services. General and administrative expenses also include facility costs, depreciation and amortization, professional services, legal and accounting fees and administrative operating costs. Within general and administrative expenses, “Other” includes expenses such as provision for billed or unbilled receivables, professional services, legal and accounting, computer costs, travel and entertainment, marketing costs and acquisition costs. We expense general and administrative costs when incurred.
Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S., or GAAP. To prepare these financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses in the reporting period. Our actual results may differ from these estimates. We have provided a summary of our significant accounting policies in Note 2 to our consolidated financial statements included elsewhere in this report. We describe below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. Our management evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions management believes are reasonable as of the date of this report.
Contract Accounting
We enter into contracts with our clients that contain various types of pricing provisions, including fixed price, time-and-materials, unit-based, and service-related provisions. The following table reflects our four reportable segments and the types of contracts that each most commonly enters into for revenue generating activities.
|
|
|
Types of Contract
|
Segment
|
(Revenue Recognition Method)
|
Energy Efficiency Services
|
Time-and-materials, unit-based and fixed price
(percentage-of-completion method)
|
Engineering Services
|
Time-and-materials, unit-based and fixed price
(percentage-of-completion method)
|
Public Finance Services
|
Service-related contracts
(proportional performance method)
|
Homeland Security Services
|
Service-related contracts
(proportional performance method)
|
Revenue on fixed price contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs (primarily exclusive of depreciation and amortization costs) incurred to date to estimated total direct costs at completion. Revenue on time-and-materials and unit-based contracts is recognized as the work is performed in accordance with the specific rates and terms of the contract. We recognize revenues for time-and-materials contracts based upon the actual hours incurred during a reporting period at contractually agreed upon rates per hour and also include in revenue all reimbursable costs incurred during a reporting period for which we have risk or on which the fee was based at the time of bid or negotiation. Certain of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue under these contracts is generally recognized under the percentage-of-completion method, consistent with fixed price contracts. Revenue on contracts that are not subject to maximum contract values is recognized based on the actual number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct incidental expenditures that we incur on the projects. In addition, revenue from overhead percentage recoveries and earned fees are included in revenue. Revenue is recognized as the related costs are incurred. For unit-based contracts, we recognize the contract price of units of a basic production product as revenue when the production product is delivered during a period. Revenue for amounts that have been billed but not earned is deferred and such
deferred revenue is referred to as billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets.
Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimate, for contracts that are recognized under the percentage-of-completion method, indicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in dispute are evaluated as claims. Costs related to un-priced change orders are expensed when incurred and recognition of the related contract revenue is based on an evaluation of the probability of recovery of the costs. Estimated profit is recognized for un-priced change orders if realization of the expected price of the change order is probable.
We consider whether our contracts require combining for revenue recognition purposes. If certain criteria are met, revenues for related contracts may be recognized on a combined basis. With respect to our contracts, it is rare that such criteria are present. We may enter into certain contracts which include separate phases or elements. If each phase or element is negotiated separately based on the technical resources required and/or the supply and demand for the services being provided, we evaluate if the contracts should be segmented. If certain criteria are met, the contracts would be segmented which could result in revenues being assigned to the different elements or phases with different rates of profitability based on the relative value of each element or phase to the estimated total contract revenue.
Applying the percentage-of-completion method of recognizing revenue requires us to estimate the outcome of our fixed price and long-term contracts. We forecast such outcomes to the best of our knowledge and belief of current and expected conditions and our expected course of action. Differences between our estimates and actual results often occur resulting in changes to reported revenue and earnings. Such changes could have a material effect on future consolidated financial statements. We did not have material revisions in estimates for contracts recognized using the percentage-of-completion method for any of the periods presented in the accompanying consolidated financial statements.
Service-related contracts, including operations and maintenance services and a variety of technical assistance services, are accounted for over the period of performance, in proportion to the cost of performance. Award and incentive fees are recorded when they are fixed and determinable and consider customer contract terms.
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon our review of all outstanding amounts on a quarterly basis. Management determines allowances for doubtful accounts through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience. Our credit risk is minimal with governmental entities and large public utilities, but disputes may arise related to these receivable amounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. For further information on the types of contracts under which we perform our services, see “Business—Contract Structure” elsewhere in this report.
Goodwill
We test our goodwill at least annually for possible impairment. We complete our annual testing of goodwill as of the last day of the first month of our fourth fiscal quarter each year to determine whether there is impairment. In addition to our annual test, we regularly evaluate whether events and circumstances have occurred that may indicate a potential impairment of goodwill. We did not recognize any goodwill impairment charges in fiscal years 2017, 2016, or 2015. We had goodwill of approximately $38.2 million as of December 29, 2017, which primarily relates to our acquisition of Integral Analytics in July 2017 and other various acquisitions in 2015 and 2016.
We test our goodwill for impairment at the level of our reporting units, which are components of our operating segments. In September 2011, FASB issued Accounting Standards Update No. 2011‑08 (“ASU 2011‑08”),
Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment
. This accounting guidance allows companies to perform a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. If a quantitative assessment is warranted, we then determine the fair value of the applicable reporting units. To estimate the
fair value of our reporting units, we use both an income approach based on management’s estimates of future cash flows and other market data and a market approach based upon multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, earned by similar public companies.
Once the fair value is determined, we then compare the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is determined to be less than the carrying value, we perform an additional assessment to determine the extent of the impairment based on the implied fair value of goodwill compared with the carrying amount of the goodwill. In the event that the current implied fair value of the goodwill is less than the carrying value, an impairment charge is recognized.
Inherent in such fair value determinations are significant judgments and estimates, including but not limited to assumptions about our future revenue, profitability and cash flows, our operational plans and our interpretation of current economic indicators and market valuations. To the extent these assumptions are incorrect or economic conditions that would impact the future operations of our reporting units change, any goodwill may be deemed to be impaired, and an impairment charge could result in a material effect on our financial position or results of operation. Almost all of our goodwill is contained in our Energy Efficiency Services, with the remainder in our Public Finance Service Segments. At our measurement date, the estimated fair value of our Energy Efficiency Services reporting unit exceeded the carrying value. A reduction in estimated fair value of our Energy Efficiency Services reporting unit could result in an impairment charge in future periods.
Accounting for Claims Against the Company
We accrue an undiscounted liability related to claims against us for which the incurrence of a loss is probable and the amount can be reasonably estimated. We disclose the amount accrued and an estimate of any reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements not to be misleading. We do not accrue liabilities related to claims when the likelihood that a loss has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. Losses related to recorded claims are included in general and administrative expenses.
Determining probability and estimating claim amounts is highly judgmental. Initial accruals and any subsequent changes in our estimates could have a material effect on our consolidated financial statements.
Business Combinations
The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for a business combination) based upon new information about facts that existed on the business combination date.
Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in an acquiree, at the acquisition date fair value. We measure goodwill as of the acquisition date as the excess of consideration transferred over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration. We charge these acquisition costs to other general and administrative expense as they are incurred.
Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements. We recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the effect on earnings of changes in depreciation, amortization or other
income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
On January 15, 2015, we and our wholly-owned subsidiary WES completed two separate acquisitions. We acquired all of the outstanding shares of Abacus, an Oregon-based energy engineering company. In addition, we also acquired substantially all of the assets of 360 Energy, a Kansas-based energy engineering company. On April 3, 2015, our wholly-owned subsidiary, Willdan Financial Services, acquired substantially all of the assets of Economists LLC, a Texas-based economic analysis and financial solutions firm serving the municipal and public sectors. On March 4, 2016, we and WES acquired substantially all of the assets of Genesys, a New York-based energy engineering company. On July 28, 2017, we and WES acquired Integral Analytics, a data analytics and software company.
As of December 29, 2017, we had not yet completed our final estimate of fair value of the assets acquired and liabilities assumed relating to the acquisition of Integral Analytics due to the timing of the transaction and lack of complete information necessary to finalize such estimates of fair value. Accordingly, we have preliminarily estimated the fair values of the assets acquired and the liabilities assumed and will finalize such fair value estimates within twelve months of the acquisition date. For further discussion of our acquisitions, see “—Acquisition of Integral Analytics” above and Note 3 “
—
Business Combinations” of the notes to our consolidated financial statements included elsewhere in this report.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of our assets and liabilities, subject to a judgmental assessment of the recoverability of deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more-likely-than-not that some of the deferred tax assets may not be realized. Significant judgment is applied when assessing the need for valuation allowances. Areas of estimation include our consideration of future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, we would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. On December 22, 2017, the Tax Act was enacted into law, which, among other items, lowered the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of the Tax Act, we recorded a one-time decrease in deferred tax expense of $1.3 million for the fiscal quarter ended December 29, 2017 to account for the remeasurement of our deferred tax assets and liabilities on the enactment date. We will continue to analyze the impacts of the Tax Act and, if necessary, record any further adjustments to our deferred tax assets and liabilities in future periods.
During each fiscal year, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets. For fiscal years 2017 and 2016, we ultimately determined that it was more-likely-than-not that the entire California net operating loss will not be utilized prior to expiration. Significant pieces of objective evidence evaluated included our history of utilization of California net operating losses in prior years for each of our subsidiaries, as well as our forecasted amount of net operating loss utilization for certain members of the combined group. As a result, we recorded a valuation allowance in the amount of $87,000 and $72,000 at the end of fiscal year 2017 and 2016, respectively, related to California net operating losses.
For acquired business entities, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
We recognize the tax benefit from uncertain tax positions if it is more-likely-than-not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to unrecognized tax benefits in income tax expense.
Subsequent to year end, we were notified that our 2016 tax return will be examined by the IRS. We have yet to determine the result due to the examination process having not commenced.
Results of Operations
The following table sets forth, for the periods indicated, certain information derived from our consolidated statements of operations expressed as a percentage of contract revenue. Amounts may not add to the totals due to rounding.
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
Contract revenue
|
|
100
|
%
|
100
|
%
|
100
|
%
|
Direct costs of contract revenue (inclusive of directly related depreciation and amortization):
|
|
|
|
|
|
|
|
Salaries and wages
|
|
16.4
|
|
18.7
|
|
23.6
|
|
Subcontractor services and other direct costs
|
|
55.6
|
|
49.9
|
|
37.2
|
|
Total direct costs of contract revenue
|
|
71.9
|
|
68.6
|
|
60.8
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
Salaries and wages, payroll taxes and employee benefits
|
|
13.4
|
|
14.9
|
|
19.1
|
|
Facilities and facility related
|
|
1.7
|
|
2.0
|
|
3.1
|
|
Stock-based compensation
|
|
1.0
|
|
0.6
|
|
0.6
|
|
Depreciation and amortization
|
|
1.4
|
|
1.5
|
|
1.5
|
|
Other
|
|
5.5
|
|
7.0
|
|
9.4
|
|
Total general and administrative expenses
|
|
23.0
|
|
26.0
|
|
33.7
|
|
Income from operations
|
|
5.0
|
|
5.4
|
|
5.5
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense, net
|
|
—
|
|
(0.1)
|
|
(0.2)
|
|
Other, net
|
|
—
|
|
—
|
|
—
|
|
Total other expense, net
|
|
—
|
|
(0.1)
|
|
(0.2)
|
|
Income before income taxes
|
|
5.0
|
|
5.3
|
|
5.3
|
|
Income tax expense
|
|
0.6
|
|
1.5
|
|
2.3
|
|
Net income
|
|
4.4
|
%
|
3.8
|
%
|
3.0
|
%
|
Fiscal Year 2017 Compared to Fiscal Year 2016
Contract revenue.
Our contract revenue was $273.4 million for fiscal year 2017, with $199.6 million attributable to the Energy Efficiency Services segment, $57.4 million attributable to the Engineering Services segment, $13.3 million attributable to the Public Finance Services segment, and $3.0 million attributable to the Homeland Security Services segment. Consolidated contract revenue increased $64.4 million, or 30.8%, to $273.4 million for fiscal year 2017 from $208.9 million for fiscal year 2016. This was primarily the result of an increase in contract revenue for our Energy Efficiency Services segment of $57.7 million, or 40.7%, to $199.6 million for fiscal year 2017 from $141.9 million for fiscal year 2016 and an increase in contract revenue for our Engineering Services segment of $5.1 million, or 9.8%, to $57.4 million for fiscal year 2017 from $52.3 million for fiscal year 2016. Contract revenue for our Public Finance Services segment increased $0.9 million, or 7.4%, to $13.3 million for fiscal year 2017 from $12.4 million for fiscal year 2016. Contract revenue for our Homeland Security Services segment increased by $0.6 million, or 26.2%, to $3.0 million for fiscal year 2017 from $2.4 million for fiscal year 2016. Contract revenue for the Energy Efficiency Services segment increased primarily due to the ramp up of new contracts and programs for performance contracts in Kansas and New Jersey, multi-family lighting contracts in New York and other utility contract expansions, including Rocky Mountain Power and San Diego Gas & Electric. Additionally, there was expanded demand for services from the
Energy Efficiency Services segment under existing contracts and the recognition of contract revenue of Genesys for an entire year compared to the prior year when the acquisition was executed. As the economy continues to grow, utility customers and governmental agencies continue to see demand from their constituents for a greener, more productive supply of energy and investment in governmental infrastructure. Contract revenue for the Engineering Services segment increased primarily due to greater demand for our planning services across all clients, building and safety services in California and Arizona, and geotechnical and public works services in California. Contract revenue for our Public Finance Services segment increased due to the continued growth across the country in the Property Assessed Clean Energy Program (PACE) that Willdan Financial Services manages, along with an increased demand for consulting services in Texas and Arizona. Contract revenue for our Homeland Security Services segment increased due to a greater demand for emergency preparedness training offerings to our clients.
Direct costs of contract revenue.
Direct costs of contract revenue increased by $53.4 million, or 37.3%, compared to the prior year, to $196.7 million for fiscal year 2017, with $154.8 million attributable to the Energy Efficiency Services segment, $34.2 million attributable to the Engineering Services segment, $5.4 million attributable to the Public Finance Services segment, and $2.3 million attributable to the Homeland Security Services segment. Direct costs of contract revenue for our Energy Efficiency Services segment increased by $49.0 million, or 46.3%, compared to the prior year, primarily due to the expanded revenue base from new contracts and programs commencing during the year and the recognition of direct costs of revenue of Genesys for an entire year compared to the prior year when the acquisition was executed. Direct costs of contract revenue also increased for our Engineering Services, Public Finance Services, and Homeland Security Services segments by $3.7 million, or 12.1%, $0.1 million, or 1.1%, and $0.7 million, or 44.5%, compared to the prior year, respectively. Direct costs of contract revenue increased for each of our Engineering Services and Public Finance Services segments primarily due to the increased number of staff members required to execute increased projects in each segment. Direct costs of contract revenue increased for our Homeland Security Services segment primarily due to a greater demand for emergency preparedness training offerings to our clients.
Subcontractor services and other direct costs increased by $47.7 million and salaries and wages increased by $5.7 million compared to the prior year. Within direct costs of contract revenue, salaries and wages decreased to 16.4% of contract revenue for fiscal year 2017 as compared to 18.7% for fiscal year 2016. Subcontractor services and other direct costs increased to 55.6% of contract revenue for fiscal year 2017 from 49.9% of contract revenue for fiscal year 2016. Subcontractor services and other direct costs increased as a percentage of contract revenue primarily due to a higher mix of revenues from performance contracts and the direct installation of energy efficiency measures compared to the prior year.
General and administrative expenses.
General and administrative expenses increased by $8.8 million, or 16.3%, to $63.0 million for fiscal year 2017 from $54.1 million for fiscal year 2016. This reflected an increase of $13.3 million in general and administrative expenses of the Energy Efficiency Services segment, offset by decreases of $4.1 million and $0.4 million in general and administrative expenses of the unallocated corporate expenses and Engineering Services segment, respectively. General and administrative expenses remained relatively flat for the Public Finance Services and Homeland Security Services segments. General and administrative expenses as a percentage of contract revenue were 23.0% for fiscal year 2017 as compared to 26.0% for fiscal year 2016. Our general and administrative expenses decreased as a percentage of contract revenue, while increasing in amount, compared to the prior year, primarily due to our increased revenue base from fiscal year 2016 to fiscal year 2017. As discussed above under “—Components of Revenue and Expense—Direct Costs of Contract Revenue,” we only allocate that portion of salaries and wages related to time spent directly generating revenue to direct costs of contract revenue, and the remainder is allocated to general and administrative expenses. As a result of our increased business levels and revenue, we have been allocating more salaries and wages to direct costs of revenues, which has correspondingly decreased the amount of salaries and wages we have allocated to general and administrative expenses.
Of the $8.8 million increase in general and administrative expenses, approximately $5.5 million resulted from an increase in salaries and wages, payroll taxes and employee benefits, $1.5 million resulted from an increase in stock-based compensation, $0.7 million resulted from an increase in depreciation and amortization, $0.6 million resulted from an increase in other general and administrative expenses, and $0.5 million resulted from an increase in facilities and facility related expenses. The increase in salaries and wages, payroll taxes and employee benefits was primarily due to increased activity requiring us to hire additional administrative employees and increased compensation for our current
employees. The increase in stock-based compensation expenses was primarily due to an increase in the issuance of grants to new employees and an employee stock purchase plan change that gives our employees a 15% purchasing discount compared to 5% in our previous plan. The increase in depreciation and amortization was primarily due to increased use of computer hardware, company vehicles and field equipment. The increase in depreciation and amortization expenses was primarily due to an increase in amortization of intangible assets from our 2016 and 2017 acquisitions. The increase in other general and administrative expenses was primarily due to interest accretion on the earn-out payments relating to our acquisitions of Economists LLC, Integral Analytics and substantially all of the assets of 360 Energy. The increase in facilities and facility related expenses was primarily due to the opening of new offices in Connecticut, New York, Ohio and Utah.
Income from operations.
As a result of the above factors, our operating income increased by $2.2 million or 18.7% to $13.7 million for fiscal year 2017 as compared to $11.5 million for fiscal year 2016 The increase was primarily due to a larger revenue base over direct costs. Income from operations, as a percentage of contract revenue, was 5.0% for fiscal year 2017 and 5.4% for fiscal year 2016. The decrease in operating margin was primarily due to direct costs of contract revenue increasing more than contract revenue increased.
Total other expense, net.
Total other expense, net, decreased to $13,000 for fiscal year 2017 as compared $177,000 for fiscal year 2016. This decrease in total other expense, net is primarily the result of lower interest expense during fiscal year 2017, due to the decreasing principal amounts outstanding on the notes payable related to our previous acquisitions.
Income tax expense.
We recorded an income tax expense of $1.6 million for fiscal year 2017, as compared to $3.1 million for fiscal year 2016. The effective tax rate for fiscal year 2017 was 11.4%, as compared to 27.0% for fiscal year 2016. The reduction in the year-over-year effective tax rate for fiscal year 2017 and the difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate was primarily attributable to increased deductions for stock options and disqualifying dispositions and the impact of the Tax Act, partially offset by energy efficient commercial building deductions that we were utilizing in 2016 and that were not available in 2017. The difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate in fiscal year 2016 primarily relates to energy efficient commercial building deductions.
On December 22, 2017, the Tax Act was enacted into law, which, among other items, lowered the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of the Tax Act, we recorded a one-time decrease in deferred tax expense of $1.3 million for the fiscal quarter ended December 29, 2017 to account for the remeasurement of our deferred tax assets and liabilities on the enactment date.
The Tax Act also includes provisions that may partially offset the benefit of the tax rate reduction. Based on our initial assessment of the Tax Act, we believe that the most significant impact on our financial statements is the remeasurement of our deferred taxes. Quantifying all of the impacts of the Tax Act requires significant judgment by our management, including the inherent complexities involved in determining the timing of reversals of our deferred tax assets and liabilities. Accordingly, we will continue to analyze the impacts of the Tax Act and, if necessary, record any further adjustments to our deferred tax assets and liabilities in future periods. For further discussion of our income tax provision, see Note 12 “—Income Taxes” of notes to our consolidated financial statements.
Shortly after the Tax Act was enacted, the SEC issued guidance under SAB 118 to address the application of GAAP and directing taxpayers to consider the impact of the Tax Act as “provisional” when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law. In accordance with SAB 118, we have recognized the provisional tax impacts. Although, we do not believe there will be any material adjustments in subsequent reporting periods, the ultimate impact may differ from the provisional amounts, due to, among other things, the limitation on the deductibility of certain executives’ compensation pursuant to Section 162(m) of the Internal Revenue Code, a detailed evaluation of the contractual terms of our fourth quarter 2017 capital additions to determine whether they qualify for the 100% expensing pursuant to the Tax Act, the significant complexity of the Tax Act and anticipated additional regulatory guidance that may be issued by the IRS and changes in analysis, interpretations and assumptions we have made and actions we may take as a result of the Tax Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
Net income.
As a result of the above factors, our net income was $12.1 million for fiscal year 2017, as compared to net income of $8.3 million for fiscal year 2016.
Fiscal Year 2016 Compared to Fiscal Year 2015
Contract revenue.
Our contract revenue was $208.9 million for fiscal year 2016, with $141.9 million attributable to the Energy Efficiency Services segment, $52.3 million attributable to the Engineering Services segment, $12.4 million attributable to the Public Finance Services segment, and $2.4 million attributable to the Homeland Security Services segment. Consolidated contract revenue increased $73.8 million, or 54.6%, to $208.9 million for fiscal year 2016 from $135.1 million for fiscal year 2015. This was primarily the result of an increase in contract revenue for our Energy Efficiency Services segment of $67.8 million, or 91.4%, to $141.9 million for fiscal year 2016 from $74.1 million for fiscal year 2015 and an increase in contract revenue for our Engineering Services segment of $6.3 million, or 13.7%, to $52.3 million for fiscal year 2016 from $46.0 million for fiscal year 2015. Contract revenue for our Public Finance Services segment increased $0.5 million, or 4.5% to $12.4 million for fiscal year 2016 from $11.9 million for fiscal year 2015. Contract revenue for our Homeland Security Services segment decreased by $0.8 million, or 24.0%, to $2.4 million for fiscal year 2016 from $3.1 million for fiscal year 2015. Contract revenue for the Energy Efficiency Services segment increased primarily because of incremental contract revenue of $48.6 million as a result of the acquisition substantially all of the assets of Genesys in March 2016. Energy Efficiency Services segment contract revenue increased an additional $19.3 million due to new contracts and expanded demand for the segment’s services under existing contracts, including the installation of energy saving measures. Contract revenue for the Engineering Services segment increased primarily due to greater demand for our city engineering services in northern California, our building and safety services, and our construction management services. Contract revenue for our Public Finance Services segment increased slightly due to the growth in our PACE program and the geographic expansion of our water/wastewater consulting services. Contract revenue for our Homeland Security Services segment decreased due to slightly lower levels of activity in the traditional planning, training and exercise consulting services business.
Direct costs of contract revenue.
Direct costs of contract revenue were $143.3 million for fiscal year 2016, with $105.8 million attributable to the Energy Efficiency Services segment, $30.5 million attributable to the Engineering Services segment, $5.3 million attributable to the Public Finance Services segment, and $1.6 million attributable to the Homeland Security Services segment. Overall, direct costs increased by $61.2 million, or 74.5%, to $143.3 million for fiscal year 2016 from $82.1 million for fiscal year 2015. Of this $61.2 million increase, $43.2 million were attributable to incremental costs as a result of the acquisition of substantially all of the assets of Genesys in March 2016. Excluding the direct costs of contract revenue attributable to the acquisition of substantially all of the assets of Genesys, direct costs of contract revenue increased primarily as a result of the growth in subcontractor services and production expenses for our Energy Efficiency Services segment. Accordingly, the increase in overall direct costs was primarily a result of an increase in direct costs for our Energy Efficiency Services segment of $56.2 million, or 113.3% for fiscal year 2016. Direct costs of contract revenue also increased for our Engineering Services and Public Finance segments by $4.6 million, or 17.8%, and $0.5 million, or 10.4%, respectively. Direct costs of contract revenue for our Homeland Security Services segment decreased by $0.2 million, or 11.1% to $1.6 million for fiscal year 2016 from $1.8 million for fiscal year 2015.
Direct costs increased as a result of increases in the use of subcontractor services and other direct costs of $54.0 million and an increase in salaries and wages of $7.1 million. Within direct costs of contract revenue, salaries and wages decreased to 18.7% of contract revenue for fiscal year 2016 as compared to 23.6% for fiscal year 2015. Subcontractor services and other direct costs increased to 49.9% of contract revenue for fiscal year 2016 from 37.2% of contract revenue for fiscal year 2015. Subcontractor services and other direct costs increased primarily because of the expansion of construction management revenues from our acquisition of substantially all of the assets of Genesys and the growth in energy efficiency, sustainability and renewable energy services of our subsidiary WES, which generally utilize a higher percentage of subcontractors and installed materials than our other services.
General and administrative expenses.
General and administrative expenses increased by $8.6 million, or 19.0%, to $54.1 million for fiscal year 2016 from $45.5 million for fiscal year 2015. This reflected increases of $7.6 million, $0.4 million and $0.6 million in general and administrative expenses of the Energy Efficiency Services, the Engineering Services and Public Finance segments, respectively. These increases were offset by a decrease of $0.2 million for our Homeland Security Services segment. General and administrative expenses increased by $4.3 million as
a result of incremental expenses associated with the acquisition of substantially all of the assets of Genesys in March 2016. Our unallocated corporate expenses increased by $0.2 million. General and administrative expenses as a percentage of contract revenue were 26.0% for fiscal year 2016 as compared to 33.7% for fiscal year 2015. This was partially due to our ability to expand the utilization of some of our employees, which resulted in those salaries and wages being allocated to direct costs, and partially due to the expanding volume of revenue derived through subcontracting and material installations. As discussed above under “—Components of Revenue and Expense—Direct Costs of Contract Revenue,” we do not allocate that portion of salaries and wages not related to time spent directly generating revenue to direct costs of contract revenue and instead charge it to general and administrative expenses.
Of the $8.6 million increase in general and administrative expenses, approximately $1.9 million resulted from an increase in other general and administrative expenses. Salaries and wages, payroll taxes and employee benefits increased by $5.3 million and stock-based compensation increased by $0.5 million. These increases were partially offset by decreases in facilities and facility related expenses and depreciation of $0.2 million. An increase of $1.1 million in depreciation and amortization was due to increased use of computer hardware, company vehicles and field equipment.
Income from operations.
As a result of the above factors, our operating income increased by $4.0 million or 53.3% to $11.5 million for fiscal year 2016 as compared to $7.5 million for fiscal year 2015. Income from operations, as a percentage of contract revenue, remained relatively flat year-over-year at 5.4% and 5.5% for each of fiscal years 2016 and 2015, respectively.
Total other expense, net.
Total other expense, net, decreased to $177,000 for fiscal year 2016 as compared $189,000 for fiscal year 2015.
Income tax expense.
Income tax expense remained flat year-over-year at $3.1 million for each of the fiscal years 2016 and 2015. The effective tax rate for fiscal year 2016 was 27.0%, as compared to 42.0% for fiscal year 2015. The reduction in the effective tax rate for fiscal year
2016 was primarily attributable to
an increase in energy efficient building deductions for fiscal year 2016. We recognized approximately $0.4 million in fiscal year 2016 in energy efficient building deductions under Section 179D of the Internal Revenue Code. During fiscal year 2016, we also recorded a reduction of income tax expense of approximately $0.5 million as a change in estimate related to energy tax deductions earned for fiscal year 2015. These reductions in income tax expense were offset by additional tax expense due to our increased profitability. The difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate primarily relates to energy efficient building deductions, as well as certain expenses that are non-deductible for federal tax purposes, including meals and entertainment, lobbying and compensation expense related to stock options. Additionally, the income tax expense in the current year reflects an adjustment to the tax effects value of deferred tax assets and liabilities resulting from changes in the estimated effective state income tax rate. For further discussion of our income tax provision, see Note 12 “—Income Taxes” of notes to our consolidated financial statements.
Net income.
As a result of the above factors, our net income was $8.3 million for fiscal year 2016, as compared to net income of $4.3 million for fiscal year 2015.
Liquidity and Capital Resources
As of December 29, 2017, we had $14.4 million of cash and cash equivalents. Our cash decreased by $8.2 million since December 30, 2016 primarily due to cash paid for the acquisition of Integral Analytics of $15.0 million, payments of $5.9 million for contingent consideration and on notes payable related to our prior acquisitions and $2.2 million for purchases of equipment and leasehold improvements, which was partially offset by cash proceeds from stock option exercises and proceeds from sales of common stock under our employee stock purchase plan of $2.7 million and cash provided by operations of $11.1 million. Our primary source of liquidity is cash generated from operations. We also have a revolving line of credit with BMO, which matures on January 20, 2020 and provides for a revolving line of credit of up to $35.0 million, including a $10.0 million standby letter of credit sub-facility. Subject to satisfying certain conditions described in the Amended and Restated Credit Agreement (the “Credit Agreement”), dated January 20, 2017, with BMO, as lender, we may request that BMO increase the aggregate amount under the revolving line of credit by up to $25.0 million, for a total facility size of $60.0 million; however, BMO is not obligated to do so. We believe that our
cash and cash equivalents on hand, cash generated by operating activities and available borrowings under our revolving line of credit will be sufficient to finance our operating activities for at least the next 12 months.
Cash Flows from Operating Activities
Cash flows provided by operating activities were $11.1 million for fiscal year 2017, as compared to $21.6 million and $8.1 million for fiscal years 2016 and 2015, respectively. Cash flows provided by operating activities for fiscal year 2017 resulted primarily from our net income and increases in accrued liabilities and accounts payable, partially offset by increases in accounts receivable. Cash flows provided by operating activities for fiscal year 2016 resulted primarily from our net income and increases in accrued liabilities and billings in excess of costs and estimated earnings on uncompleted contracts and collections of accounts receivable. Cash flows provided by operating activities for fiscal year 2015 resulted primarily from our net income and increases in billings in excess of costs and estimated earnings on uncompleted contracts and accounts payable.
Cash Flows used in Investing Activities
Cash flows used in investing activities were $16.8 million for fiscal year 2017, as compared to $10.5 million and $10.6 million for fiscal years 2016 and 2015, respectively. Cash flows used in investing activities for fiscal year 2017 were primarily due to cash paid for the acquisition of Integral Analytics and the purchase of equipment and leasehold improvements. Cash flows used in investing activities for fiscal year 2016 were primarily due to cash paid in the acquisition of substantially all of the assets of Genesys and the purchase of equipment and leasehold improvements. Cash flows used in investing activities for fiscal year 2015 were primarily due to cash paid for the acquisition of Abacus and the acquisition of substantially all of the assets of 360 Energy and the purchase of equipment and leasehold improvements.
Cash Flows from Financing Activities
Cash flows used in financing activities were $2.5 million for fiscal year 2017, as compared to $4.9 million for fiscal year 2016 and cash flows provided by financing activities of $0.8 million for fiscal year 2015. Cash flows used in financing activities for fiscal year 2017 were primarily attributable to payments on notes payable and payments on contingent consideration related to our previous acquisitions, which were partially offset by proceeds from stock option exercises and borrowings under our line of credit. Cash flows used in financing activities for fiscal year 2016 were primarily attributable to payments on notes payable to Abacus and 360 Energy and cash paid for earn-out payments owed to the sellers of 360 Energy, which were partially offset by proceeds from notes payable and proceeds from stock option exercises. Cash flows provided by financing activities for fiscal year 2015 were primarily attributable to proceeds from notes payable and proceeds from stock option exercises, which were partially offset by payments on notes payable to Abacus and 360 Energy.
Outstanding Indebtedness
Credit Facility
.
On January 20, 2017, we and each of our subsidiaries as guarantors (the “Guarantors”), entered into the Credit Agreement with BMO, as lender. The Credit Agreement amends and extends our prior credit agreement with BMO, which was set to mature on March 24, 2017.
The Credit Agreement provides for a $35.0 million revolving line of credit, including a $10.0 million standby letter of credit sub-facility, and matures on January 20, 2020.
Subject to satisfying certain conditions described in the Credit Agreement, we may request that BMO increase the aggregate amount under the revolving line of credit by up to $25.0 million, for a total facility size of $60.0 million; however, BMO is not obligated to do so. Unlike the prior credit agreement with BMO, the revolving line of credit is no longer subject to a borrowing base limitation and the Credit Agreement no longer includes a delayed draw term loan facility.
Borrowings under the Credit Agreement bear interest at a rate equal to either, at our option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5% or one-month London Interbank Offered Rate (“LIBOR”) plus 1% (the “Base Rate”) or (ii) LIBOR, in each case plus an applicable margin ranging from 0.25% to 1.00% with respect to Base Rate borrowings and 1.25% to 2.00% with respect to LIBOR borrowings. The applicable margin will be based upon our consolidated leverage ratio. We will also be required to pay a commitment fee for the unused portion of the revolving
line of credit, which will range from 0.20% to 0.35% per annum, and fees on any letters of credit drawn under the facility, which will range from 0.94% to 1.50%, in each case, depending on our consolidated leverage ratio.
Borrowings under the revolving line of credit are guaranteed by all of our direct and indirect subsidiaries and secured by substantially all of our and the Guarantors’ assets.
The Credit Agreement contains customary representations and affirmative covenants, including certain notice and financial reporting requirements. The Credit Agreement also requires compliance with financial covenants that require us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio.
The Credit Agreement includes customary negative covenants, including (i) restrictions on the incurrence of additional indebtedness by us or the Guarantors and the incurrence of additional liens on property, (ii) restrictions on permitted acquisitions, including that the total consideration payable for all permitted acquisitions (including potential future earn-out obligations) shall not exceed $20.0 million during the term of the Credit Agreement and the total consideration for any individual permitted acquisition shall not exceed $10.0 million without BMO’s consent, and (iii) limitations on asset sales, mergers and acquisitions. Further, the Credit Agreement limits the payment of future dividends and distributions and share repurchases by us; however, we are permitted to repurchase up to $8.0 million of shares of common stock under certain conditions, including that, at the time of any such repurchase, (a) we are able to meet the financial covenant requirements under the Credit Agreement after giving effect to the share repurchase, (b) we have at least $5.0 million of liquidity (unrestricted cash or undrawn availability under the revolving line of credit), and (c) no default exists or would arise under the Credit Agreement after giving effect to such repurchase. In addition, the Credit Agreement includes customary events of default. Upon the occurrence of an event of default, the interest rate will be increased by 2.0%, BMO has the option to make any loans then outstanding under the Credit Agreement immediately due and payable, and BMO is no longer obligated to extend further credit to us under the Credit Agreement.
As of March 9, 2018, $2.5 million was outstanding under the revolving line of credit and $2.7 million in letters of credit were issued.
We believe that we were in compliance with all covenants contained in the Credit Agreement as of March 9, 2018.
Insurance Premiums
We have also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies. During our annual insurance renewals in the fourth quarter of our fiscal year ended December 29, 2017, we did not elect to finance our insurance premiums for the upcoming fiscal year.
The unpaid balance of the financed premiums totaled $0 and $599,000 for fiscal years 2017 and 2016, respectively.
Contractual Obligations
We have certain cash obligations and other commitments which will impact our short and long‑term liquidity. At December 29, 2017, such obligations and commitments consisted of long‑term debt, operating leases and capital leases. The following table sets forth our contractual obligations as of December 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
5 Years
|
|
Long term debt(1)
|
|
$
|
2,883,000
|
|
$
|
383,000
|
|
$
|
2,500,000
|
|
$
|
—
|
|
$
|
—
|
|
Interest payments on debt outstanding(2)
|
|
|
133,000
|
|
|
133,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating leases
|
|
|
10,092,000
|
|
|
3,076,000
|
|
|
4,264,000
|
|
|
2,475,000
|
|
|
277,000
|
|
Capital leases
|
|
|
465,000
|
|
|
301,000
|
|
|
164,000
|
|
|
—
|
|
|
—
|
|
Total contractual cash obligations
|
|
$
|
13,573,000
|
|
$
|
3,893,000
|
|
$
|
6,928,000
|
|
$
|
2,475,000
|
|
$
|
277,000
|
|
|
(1)
|
|
Long‑term debt includes $2.5 million outstanding under our Credit Agreement as of December 29, 2017 and the deferred purchase price outstanding for our acquisition of substantially all of the assets of Genesys.
|
|
(2)
|
|
Future interest payments on floating rate debt are estimated using floating rates in effect as of December 29, 2017. For interest payments on our revolving credit facility, we assume there will be no additional borrowings or repayments.
|
The table above does not include the earn-out payments owed in connection with our acquisitions of Integral Analytics, Economists LLC and substantially all of the assets of 360 Energy. As of December 29, 2017, we are obligated to pay up to (i) $12.0 million in cash based on future work obtained from the business of Integral Analytics during the three years after the closing of the acquisition, of which $5.6 million is recorded as contingent consideration payable, payable in installments, if certain financial targets are met during the three years, (ii) $3.6 million in cash, payable in installments, if certain financial targets of our divisions made up of the assets acquired from, and former employees of, 360 Energy are met during fiscal year 2018 and 2019, and (iii) $0.1 million in cash, payable in installments, for our division made up of the assets acquired from, and former employees of, Economists LLC. As of December 29, 2017, we had contingent consideration payable of $9.3 million related to these acquisitions, which includes $1.2 million of accretion (net of fair value adjustments) related to the contingent consideration.
Off‑Balance Sheet Arrangements
Other than operating lease commitments, we do not have any off‑balance sheet financing arrangements or liabilities. In addition, our policy is not to enter into derivative instruments, futures or forward contracts. Finally, we do not have any majority‑owned subsidiaries or any interests in, or relationships with, any special‑purpose entities that are not included in the consolidated financial statements.
Recent Accounting Pronouncements
In August 2016, the FASB issued
Accounting Standards Update (“ASU”)
2016-15,
Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”),
which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides for retrospective application for all periods presented. We do not believe the guidance will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which clarifies existing accounting literature relating to how and when revenue is recognized by an entity. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition
, and most industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In doing so, an entity will need to exercise a greater degree of judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration, which may include change orders and claims, to include in the transaction price, and allocating the transaction price to each separate performance obligation. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35,
Revenue Recognition-Construction-Type and Production-Type Contracts
. In August 2015, the FASB issued Update 2015-14, which defers the implementation of ASU 2014-09 for one year from the initial effective date. ASU 2014-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017, and is to be applied either retrospectively or using the cumulative effect transition method, with early adoption not permitted.
In December 2016, the FASB issued ASU 2016-20,
Revenue from Contracts with Customers
(Topic 606), which further clarifies the current revenue recognition guidance. This update is intended to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. We will adopt the requirements of the new standard effective beginning fiscal year 2018, and we expect to use the Modified Retrospective method.
In 2017, we established an implementation team which included senior managers from our finance and accounting group. The implementation team has evaluated the impact of adopting the new standard on our contracts
expected to be uncompleted as of December 30, 2017 (the date of adoption). The evaluation included reviewing our accounting policies and practices to identify differences that would result from applying the requirements of the new standard. We have identified and made changes to our processes, systems and controls to support recognition and disclosure under the new standard. The implementation team has worked closely with various professional consultants and attended several formal conferences and seminars to conclude on certain interpretative issues
.
Under the new standard, we will continue to recognize engineering and construction contract revenue over time using the percentage of completion method, based primarily on contract cost incurred to date compared to total estimated contract cost. Revenue on the vast majority of our contracts will continue to be recognized over time because of the continuous transfer of control to the customer. A relatively small portion of our contract portfolio will change from recognizing revenue from design and construction management phases separately to recognizing revenue as a single performance obligation, which will result in a more consistent recognition of revenue and margin over the term of the contract. Revenue recognition for software licenses issued by our Integral Analytics unit will change from amortizing the gross license revenue over the license period to recognizing the full amount of most non-cancellable licenses upon acceptance of the software by the customer, in recognition of the fulfillment of the performance obligation at that point in time. Certain additional performance obligations beyond the base software license may be separated from the gross license fee and amortized over time. We do not believe the adoption of the guidance will have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted.
We elected to early adopt ASU 2016-09 on a prospective basis, which resulted in a decrease to tax expense of approximately $1.6 million for the fiscal year ended December 29, 2017
.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842).
The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. We are evaluating the impact of the adoption of this update on our consolidated financial statements and related disclosures.
A variety of proposed or otherwise potential accounting standards are currently being studied by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market risk sensitive financial instruments, including long‑term debt.
We had cash and cash equivalents of $14.4 million as of December 29, 2017. This amount represents cash on hand in business checking accounts with BMO.
We do not engage in trading activities and do not participate in foreign currency transactions or utilize derivative financial instruments.
We are subject to interest rate risk in connection with borrowings under our revolving line of credit which bears interest at variable rates. At December 29, 2017, we had $2.5 million of borrowings outstanding under our $35.0 million revolving credit facility and $2.7 million in letters of credit were issued with $29.8 million available for borrowing after
considering the credit agreement’s debt covenants. Borrowings under the Credit Agreement bear interest at a rate equal to either, at our option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5% or one-month LIBOR plus 1% (the “Base Rate”) or (ii) LIBOR, in each case plus an applicable margin ranging from 0.25% to 1.00% with respect to Base Rate borrowings and 1.25% to 2.00% with respect to LIBOR borrowings, and mature on January 20, 2020. The applicable margin will be based upon our consolidated leverage ratio. We will also be required to pay a commitment fee for the unused portion of the revolving line of credit, which will range from 0.20% to 0.35% per annum, and fees on any letters of credit drawn under the facility, which will range from 0.94% to 1.50%, in each case, depending on our consolidated leverage ratio. Our borrowings under the revolving line of credit bear interest at the LIBOR rate plus an applicable margin ranging between 1.25% and 2.00%, currently set at the LIBOR rate plus 1.5%, or 2.8% as of December 29, 2017 and matures on January 20, 2020. We do not have any interest rate hedges or swaps. Based upon the amount of outstanding indebtedness, a one percentage point change in the assumed interest rate would change our annual interest expense by approximately $25,000 in 2017.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
The financial statements and related financial information, as listed under Item 15, appear in a separate section of this annual report beginning on page F‑1.
Index to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in and/or disagreements with accountants on accounting and financial disclosure during the fiscal year ended December 29, 2017.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures defined in Rule 13a‑15(e) under the Exchange Act, as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our Chairman and Chief Executive Officer, Thomas Brisbin, and our Chief Financial Officer, Stacy McLaughlin, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 29, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, as of December 29, 2017. No change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a‑15(f) under the Securities Exchange Act of 1934, as amended). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 29, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 Framework). Our management has concluded that, as of December 29, 2017, our internal control over financial reporting was effective based on these criteria.
As discussed in Note 3 to our consolidated financial statements, we acquired all of the outstanding shares of Integral Analytics during 2017. As permitted by guidelines established by the SEC for newly acquired business, we excluded the acquisitions from the scope of our annual report on internal controls over financial reporting for the fiscal year ended December 29, 2017. This acquisition contributed approximately $0.6 million to our consolidated total assets as of December 29, 2017, and $1.1 million to our consolidated revenues for the fiscal year ended December 29, 2017. We are in the process of integrating this business into our overall internal controls over financial reporting process and plan to include it in our scope for the fiscal year ended December 28, 2018.
Report of Independent Registered Public Accounting Firm
KPMG LLP, the independent registered public accounting firm that audited the fiscal year 2017 consolidated financial statements included in this Annual Report on Form 10‑K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 29, 2017, which is included herein.
Changes in Internal Controls
There were no changes in our internal control over financial reporting during the quarter ended December 29, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART II
I
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to Willdan Group, Inc.’s Proxy Statement for its 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the Company’s 2017 fiscal year.
We have posted our Code of Ethical Conduct on our website, www.willdan.com, under the heading “Investors—Corporate Governance—Governance Documents.” The Code of Ethical Conduct applies to our Chief Executive Officer and Chief Financial Officer. Upon request and free of charge, we will provide any person with a copy of the Code of Ethical Conduct. See “Item 1. Business—Available Information.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to Willdan Group, Inc.’s Proxy Statement for its 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the Company’s 2017 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated by reference to Willdan Group, Inc.’s Proxy Statement for its 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the Company’s 2017 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to Willdan Group, Inc.’s Proxy Statement for its 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the Company’s 2017 fiscal year.
ITEM 14. PRINCIPAL ACCOUNT
ING FEES AND SERVICES
The information required by this item is incorporated by reference to Willdan Group, Inc.’s Proxy Statement for its 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the Company’s 2017 fiscal year.
PART I
V
ITEM 15. EXHIBITS
, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1.
Financial Statements
The following financial statements of Willdan Group, Inc. and report of independent auditors are included in Item 8 of this annual report and submitted in a separate section beginning on page F‑1:
2.
Financial Statements Schedules
All required schedules are omitted because they are not applicable or the required information is shown in the financial statements or the accompanying notes.
3.
Exhibits
The exhibits filed as part of this annual report are listed in Item 15(b).
(b) Exhibits.
The following exhibits are filed as a part of this report:
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
2.1
|
|
Stock Purchase Agreement, dated as of January 15, 2015, by and among Willdan Energy Solutions, Abacus Resource Management Company, Willdan Group, Inc. and the Shareholders of Abacus Resource Management Company
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on January 21, 2015)
|
2.2
|
|
Asset Purchase Agreement, dated as of January 15, 2015, by and among Willdan Energy Solutions, Willdan Group, Inc. and 360 Energy Engineers, LLC
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on January 21, 2015)
|
2.3
|
|
Asset Purchase and Merger Agreement, dated as of February 26, 2016, by and among Willdan Group, Inc., Willdan Energy Solutions, WESGEN, Inc., Genesys Engineering P.C., Ronald W. Mineo and Robert J. Braun
(incorporated by reference to Willdan Group, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 16, 2016)
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
2.4
|
|
Addendum to Asset Purchase and Merger Agreement, dated as of February 26, 2016, by and among Willdan Group, Inc., Willdan Energy Solutions, WESGEN, Inc., Genesys Engineering P.C., Ronald W. Mineo and Robert J. Braun
(incorporated by reference to Willdan Group, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 10, 2017)
|
2.5
|
|
Stock Purchase Agreement, dated July 28, 2017, by and among Willdan Group, Inc., Willdan Energy Solutions, Integral Analytics, Inc., the Shareholders of Integral Analytics, Inc. and the Sellers’ Representative (as defined therein) (portions of this exhibit have been omitted pursuant to a request for confidential treatment)
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on August 3, 2017)
|
3.1
|
|
First Amended and Restated Certificate of Incorporation of Willdan Group, Inc.
(incorporated by reference to Willdan Group, Inc.’s Registration Statement on Form S-1, filed with the SEC on August 9, 2006, as amended (File No. 333-136444))
|
3.2
|
|
Amended and Restated Bylaws of Willdan Group, Inc.
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on March 8, 2018)
|
4.1
|
|
Specimen Stock Certificate for shares of the Registrant’s Common Stock
(incorporated by reference to Willdan Group, Inc.’s Registration Statement on Form S-1, filed with the SEC on August 9, 2006, as amended (File No. 333-136444))
|
4.2
|
|
The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to issues of long‑term debt of Willdan Group, Inc. and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of Willdan Group, Inc. and its subsidiaries.
|
10.1
|
|
Amended and Restated Credit Agreement, dated as of January 20, 2017, among Willdan Group, Inc., the Guarantors (as defined therein) and BMO Harris Bank N.A.
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on January 24, 2017)
|
10.2
|
|
Master Reaffirmation of and Amendment to Collateral Documents, dated as of January 20, 2017, among Willdan Group, Inc. and the other Debtors (as defined therein) and BMO Harris Bank N.A.
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on January 24, 2017)
|
10.3
|
|
Security Agreement, dated as of March 24, 2014, between Willdan Group, Inc. and BMO Harris Bank N.A. (portions of this exhibit have been omitted pursuant to a request for confidential treatment)
(incorporated by reference to Willdan Group, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 25, 2014)
|
10.4†
|
|
Willdan Group, Inc. 2006 Stock Incentive Plan
(incorporated by reference to Willdan Group, Inc.’s Registration Statement on Form S-1, filed with the SEC on August 9, 2006, as amended (File No. 333-136444))
|
10.5†
|
|
Form of Incentive Stock Option Agreement
(incorporated by reference to Willdan Group, Inc.’s Registration Statement on Form S-1, filed with the SEC on August 9, 2006, as amended (File No. 333-136444))
|
10.6†
|
|
Form of Non‑Qualified Stock Option Agreement
(incorporated by reference to Willdan Group, Inc.’s Registration Statement on Form S-1, filed with the SEC on August 9, 2006, as amended (File No. 333-136444))
|
10.7†
|
|
Willdan Group, Inc. Amended and Restated 2008 Performance Incentive Plan
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on June 9, 2017)
|
10.8†
|
|
Amended and Restated Willdan Group, Inc. 2006 Employee Stock Purchase Plan
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on June 9, 2017)
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
10.9†
|
|
Form of Indemnification Agreement between Willdan Group, Inc. and its Directors and Officers
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on June 13, 2016)
|
10.10†
|
|
Offer Letter from Willdan Group, Inc. to Daniel Chow dated October 29, 2008 and accepted November 9, 2008
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on December 17, 2008)
|
10.11†
|
|
Employment Agreement, dated as of May 3, 2011 by and between Willdan Group, Inc. and Thomas D. Brisbin
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on May 4, 2011)
|
10.12†
|
|
Employment Agreement, dated as of May 3, 2011, by and between Willdan Group, Inc. and Marc Tipermas
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on May 4, 2011)
|
10.13†
|
|
Employment Agreement, dated as of December 17, 2014, by and between Willdan Group, Inc. and Mike Bieber
(incorporated by reference to Willdan Group, Inc.’s Current Report on Form 8-K, filed with the SEC on January 7, 2015)
|
21.1*
|
|
Subsidiaries of Willdan Group, Inc.
|
23.1*
|
|
Consent of Independent Registered Public Accounting Firm
|
24.1*
|
|
Power of Attorney (included on signature page hereto)
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Rule 13a‑14(a) and 15d‑14(a) under the Securities Exchange Act of 1934, as adopted pursuant to § 302 of the Sarbanes‑Oxley Act of 2002
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Rule 13a‑14(a) or 15d‑14(a) under the Securities Exchange Act of 1934, as adopted pursuant to § 302 of the Sarbanes‑Oxley Act of 2002
|
32.1*
|
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to § 906 of the Sarbanes‑Oxley Act of 2002
|
101*
|
|
Interactive data files pursuant to Rule 405 of Regulation S‑T: (i) the Consolidated Balance Sheets as of December 29, 2017 and December 30, 2016; (ii) the Consolidated Statements of Operations for each of the fiscal years in the three‑year period ended December 29, 2017; (iii) the Consolidated Statements of Stockholders’ Equity for each of the fiscal years in the three‑year period ended December 29, 2017; (iv) the Consolidated Statement of Cash Flows for each of the fiscal years in the three‑year period ended December 29, 2017; and (v) the Notes to the Consolidated Financial Statements.
|
*
Filed herewith.
†
Indicates a management contract or compensating plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
WILLDAN GROUP, INC.
|
|
|
|
/s/ Stacy B. McLaughlin
|
|
Stacy B. McLaughlin
|
|
Chief Financial Officer and Vice President
|
|
March 9, 2018
|
|
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Stacy McLaughlin his/her attorney‑in‑fact, with the power of substitution, for him/her in any and all capacities, to sign any amendments to this Report on Form 10‑K and to file the same, with Exhibits thereto and other documents in connection therewith with the SEC, hereby ratifying and confirming all that said attorney‑in‑fact, or substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Thomas D. Brisbin
|
|
Chairman and Chief Executive Officer (principal executive officer)
|
|
March 9, 2018
|
Thomas D. Brisbin
|
|
|
|
|
|
|
/s/ Stacy B. McLaughlin
|
|
Chief Financial Officer and Vice President (principal financial officer and principal accounting officer)
|
|
March 9, 2018
|
Stacy B. McLaughlin
|
|
|
|
|
|
|
/s/ Keith W. Renken
|
|
Director
|
|
March 9, 2018
|
Keith W. Renken
|
|
|
|
|
|
|
/s/ Steven A. Cohen
|
|
Director
|
|
March 9, 2018
|
Steven A. Cohen
|
|
|
|
|
|
|
/s/ Raymond W. Holdsworth
|
|
Director
|
|
March 9, 2018
|
Raymond W. Holdsworth
|
|
|
|
|
|
|
/s/ Douglas J. McEachern
|
|
Director
|
|
March 9, 2018
|
Douglas J. McEachern
|
|
|
|
|
|
|
/s/ Dennis V. McGinn
|
|
Director
|
|
March 9, 2018
|
Dennis V. McGinn
|
|
|
|
|
|
|
/s/ Curtis Probst
|
|
Director
|
|
March 9, 2018
|
Curtis Probst
|
|
|
|
|
|
|
|
|
|
/s/ Mohammad Shahidehpour
|
|
Director
|
|
March 9, 2018
|
Mohammad Shahidehpour
|
|
|
|
|
|
|
|
|
|
/s/ Win Westfall
|
|
Director
|
|
March 9, 2018
|
Win Westfall
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Willdan Group, Inc.:
Opinion on the Consolidated
Financial Statements
We have audited the accompanying consolidated balance sheets of Willdan Group, Inc. and subsidiaries (the Company) as of December 29, 2017 and December 30, 2016, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 29, 2017, December 30, 2016 and January 1, 2016, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2017 and December 30, 2016, and the results of its operations and its cash flows for the years ended December 29, 2017, December 30, 2016 and January 1, 2016 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 29, 2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 9, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Irvine, California
March 9, 2018
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Willdan Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Willdan Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 29, 2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 29, 2017 and December 30, 2016, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 29, 2017,
December 30, 2016 and January 1, 2016 and the related notes (collectively, the consolidated financial statements), and our report dated
March 9, 2018
expressed an unqualified opinion on those consolidated financial statements.
Willdan Group, Inc. acquired all of the outstanding shares of Integral Analytics, Inc. during 2017, and management excluded from its assessment of effectiveness of Willdan Group, Inc.’s internal control over financial reporting as of December 29, 2017, Integral Analytics, Inc.’s internal control over financial reporting associated with total assets of $606,000 and total revenues of $1,086,000 included in the consolidated financial statements of Willdan Group, Inc. and subsidiaries as of and for the year ended December 29, 2017. Our audit of internal control over financial reporting of Willdan Group, Inc. also excluded an evaluation of the internal control over financial reporting of Integral Analytics, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting
. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Irvine, California
March 9, 2018
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
S
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
December 30,
|
|
|
|
2017
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,424,000
|
|
$
|
22,668,000
|
|
Accounts receivable, net of allowance for doubtful accounts of $369,000 and $785,000 at December 29, 2017 and December 30, 2016, respectively
|
|
|
38,441,000
|
|
|
30,285,000
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
24,732,000
|
|
|
18,988,000
|
|
Other receivables
|
|
|
1,833,000
|
|
|
699,000
|
|
Prepaid expenses and other current assets
|
|
|
3,760,000
|
|
|
2,601,000
|
|
Total current assets
|
|
|
83,190,000
|
|
|
75,241,000
|
|
Equipment and leasehold improvements, net
|
|
|
5,306,000
|
|
|
4,511,000
|
|
Goodwill
|
|
|
38,184,000
|
|
|
21,947,000
|
|
Other intangible assets, net
|
|
|
10,666,000
|
|
|
5,941,000
|
|
Other assets
|
|
|
826,000
|
|
|
707,000
|
|
Total assets
|
|
$
|
138,172,000
|
|
$
|
108,347,000
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
20,826,000
|
|
$
|
17,395,000
|
|
Accrued liabilities
|
|
|
23,293,000
|
|
|
19,049,000
|
|
Contingent consideration payable
|
|
|
4,246,000
|
|
|
1,925,000
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
7,321,000
|
|
|
8,377,000
|
|
Notes payable
|
|
|
383,000
|
|
|
3,972,000
|
|
Capital lease obligations
|
|
|
289,000
|
|
|
334,000
|
|
Total current liabilities
|
|
|
56,358,000
|
|
|
51,052,000
|
|
Contingent consideration payable
|
|
|
5,062,000
|
|
|
2,537,000
|
|
Notes payable
|
|
|
2,500,000
|
|
|
2,074,000
|
|
Capital lease obligations, less current portion
|
|
|
160,000
|
|
|
210,000
|
|
Deferred lease obligations
|
|
|
614,000
|
|
|
714,000
|
|
Deferred income taxes, net
|
|
|
2,463,000
|
|
|
1,842,000
|
|
Other noncurrent liabilities
|
|
|
363,000
|
|
|
—
|
|
Total liabilities
|
|
|
67,520,000
|
|
|
58,429,000
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding
|
|
|
—
|
|
|
—
|
|
Common stock, $0.01 par value, 40,000,000 shares authorized; 8,799,000 and 8,348,000 shares issued and outstanding at December 29, 2017 and December 30, 2016, respectively
|
|
|
88,000
|
|
|
83,000
|
|
Additional paid-in capital
|
|
|
50,976,000
|
|
|
42,376,000
|
|
Retained earnings
|
|
|
19,588,000
|
|
|
7,459,000
|
|
Total stockholders’ equity
|
|
|
70,652,000
|
|
|
49,918,000
|
|
Total liabilities and stockholders’ equity
|
|
$
|
138,172,000
|
|
$
|
108,347,000
|
|
See accompanying notes to consolidated financial statements.
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
$
|
273,352,000
|
|
$
|
208,941,000
|
|
$
|
135,103,000
|
|
|
|
|
|
|
|
|
|
Direct costs of contract revenue (inclusive of directly related depreciation and amortization):
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
44,743,000
|
|
|
39,024,000
|
|
|
31,880,000
|
Subcontractor services and other direct costs
|
|
151,919,000
|
|
|
104,236,000
|
|
|
50,200,000
|
Total direct costs of contract revenue
|
|
196,662,000
|
|
|
143,260,000
|
|
|
82,080,000
|
|
|
|
|
|
|
|
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
Salaries and wages, payroll taxes and employee benefits
|
|
36,534,000
|
|
|
31,084,000
|
|
|
25,741,000
|
Facilities and facility related
|
|
4,624,000
|
|
|
4,085,000
|
|
|
4,246,000
|
Stock-based compensation
|
|
2,774,000
|
|
|
1,239,000
|
|
|
777,000
|
Depreciation and amortization
|
|
3,949,000
|
|
|
3,204,000
|
|
|
2,072,000
|
Other
|
|
15,105,000
|
|
|
14,525,000
|
|
|
12,657,000
|
Total general and administrative expenses
|
|
62,986,000
|
|
|
54,137,000
|
|
|
45,493,000
|
Income from operations
|
|
13,704,000
|
|
|
11,544,000
|
|
|
7,530,000
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
(111,000)
|
|
|
(179,000)
|
|
|
(207,000)
|
Other, net
|
|
98,000
|
|
|
2,000
|
|
|
18,000
|
Total other expense, net
|
|
(13,000)
|
|
|
(177,000)
|
|
|
(189,000)
|
Income before income taxes
|
|
13,691,000
|
|
|
11,367,000
|
|
|
7,341,000
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
1,562,000
|
|
|
3,068,000
|
|
|
3,082,000
|
Net income
|
$
|
12,129,000
|
|
$
|
8,299,000
|
|
$
|
4,259,000
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.42
|
|
$
|
1.01
|
|
$
|
0.54
|
Diluted
|
$
|
1.32
|
|
$
|
0.97
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
8,541,000
|
|
|
8,219,000
|
|
|
7,834,000
|
Diluted
|
|
9,155,000
|
|
|
8,565,000
|
|
|
8,113,000
|
See accompanying notes to consolidated financial statements.
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT
Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Retained Earnings
|
|
Total
|
|
Balances at January 2, 2015
|
|
7,635,000
|
|
$
|
76,000
|
|
$
|
35,436,000
|
|
$
|
(5,099,000)
|
|
$
|
30,413,000
|
|
Shares of common stock issued in connection with employee stock purchase plan
|
|
15,000
|
|
|
—
|
|
|
170,000
|
|
|
—
|
|
|
170,000
|
|
Shares of common stock issued in connection with incentive stock plan
|
|
131,000
|
|
|
1,000
|
|
|
511,000
|
|
|
—
|
|
|
512,000
|
|
Stock issued to acquire business
|
|
123,000
|
|
|
2,000
|
|
|
1,483,000
|
|
|
—
|
|
|
1,485,000
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
777,000
|
|
|
—
|
|
|
777,000
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,259,000
|
|
|
4,259,000
|
|
Balances at January 1, 2016
|
|
7,904,000
|
|
$
|
79,000
|
|
$
|
38,377,000
|
|
$
|
(840,000)
|
|
$
|
37,616,000
|
|
Shares of common stock issued in connection with employee stock purchase plan
|
|
24,000
|
|
|
—
|
|
|
209,000
|
|
|
—
|
|
|
209,000
|
|
Shares of common stock issued in connection with incentive stock plan
|
|
164,000
|
|
|
2,000
|
|
|
325,000
|
|
|
—
|
|
|
327,000
|
|
Stock issued to acquire businesses
|
|
256,000
|
|
|
2,000
|
|
|
2,226,000
|
|
|
—
|
|
|
2,228,000
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
1,239,000
|
|
|
—
|
|
|
1,239,000
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,299,000
|
|
|
8,299,000
|
|
Balance at December 30, 2016
|
|
8,348,000
|
|
$
|
83,000
|
|
$
|
42,376,000
|
|
$
|
7,459,000
|
|
$
|
49,918,000
|
|
Shares of common stock issued in connection with employee stock purchase plan
|
|
62,000
|
|
|
1,000
|
|
|
829,000
|
|
|
—
|
|
|
830,000
|
|
Shares of common stock issued in connection with incentive stock plan
|
|
298,000
|
|
|
3,000
|
|
|
1,898,000
|
|
|
—
|
|
|
1,901,000
|
|
Stock issued to acquire business
|
|
91,000
|
|
|
1,000
|
|
|
3,099,000
|
|
|
—
|
|
|
3,100,000
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
2,774,000
|
|
|
—
|
|
|
2,774,000
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,129,000
|
|
|
12,129,000
|
|
Balance at December 29, 2017
|
|
8,799,000
|
|
$
|
88,000
|
|
$
|
50,976,000
|
|
$
|
19,588,000
|
|
$
|
70,652,000
|
|
See accompanying notes to consolidated financial statements.
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
S
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,129,000
|
|
$
|
8,299,000
|
|
$
|
4,259,000
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,082,000
|
|
|
3,220,000
|
|
|
2,072,000
|
|
Deferred income taxes, net
|
|
|
621,000
|
|
|
1,225,000
|
|
|
1,758,000
|
|
Lease abandonment recovery, net
|
|
|
—
|
|
|
—
|
|
|
(44,000)
|
|
Loss (gain) on sale/disposal of equipment
|
|
|
27,000
|
|
|
4,000
|
|
|
(37,000)
|
|
(Recovery of) provision for doubtful accounts
|
|
|
(189,000)
|
|
|
216,000
|
|
|
659,000
|
|
Stock-based compensation
|
|
|
2,774,000
|
|
|
1,239,000
|
|
|
777,000
|
|
Accretion and fair value adjustments of contingent consideration
|
|
|
1,156,000
|
|
|
21,000
|
|
|
547,000
|
|
Changes in operating assets and liabilities, net of effects from business acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,412,000)
|
|
|
1,288,000
|
|
|
(4,354,000)
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(5,744,000)
|
|
|
(4,057,000)
|
|
|
(1,180,000)
|
|
Other receivables
|
|
|
(1,126,000)
|
|
|
82,000
|
|
|
31,000
|
|
Prepaid expenses and other current assets
|
|
|
(1,096,000)
|
|
|
(519,000)
|
|
|
203,000
|
|
Other assets
|
|
|
25,000
|
|
|
(169,000)
|
|
|
31,000
|
|
Accounts payable
|
|
|
3,186,000
|
|
|
206,000
|
|
|
1,842,000
|
|
Accrued liabilities
|
|
|
4,329,000
|
|
|
8,409,000
|
|
|
(1,320,000)
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(1,593,000)
|
|
|
2,159,000
|
|
|
2,285,000
|
|
Deferred lease obligations
|
|
|
(100,000)
|
|
|
(23,000)
|
|
|
573,000
|
|
Net cash provided by operating activities
|
|
|
11,069,000
|
|
|
21,600,000
|
|
|
8,102,000
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment and leasehold improvements
|
|
|
(2,178,000)
|
|
|
(1,662,000)
|
|
|
(2,475,000)
|
|
Proceeds from sale of equipment
|
|
|
—
|
|
|
15,000
|
|
|
7,000
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(14,603,000)
|
|
|
(8,857,000)
|
|
|
(8,168,000)
|
|
Net cash used in investing activities
|
|
|
(16,781,000)
|
|
|
(10,504,000)
|
|
|
(10,636,000)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Payments on contingent consideration
|
|
|
(1,709,000)
|
|
|
(1,284,000)
|
|
|
—
|
|
Payments on notes payable
|
|
|
(4,164,000)
|
|
|
(4,378,000)
|
|
|
(2,090,000)
|
|
Proceeds from notes payable
|
|
|
—
|
|
|
733,000
|
|
|
2,606,000
|
|
Borrowings under line of credit
|
|
|
1,000,000
|
|
|
—
|
|
|
—
|
|
Principal payments on capital lease obligations
|
|
|
(390,000)
|
|
|
(522,000)
|
|
|
(350,000)
|
|
Proceeds from stock option exercise
|
|
|
1,901,000
|
|
|
327,000
|
|
|
512,000
|
|
Proceeds from sales of common stock under employee stock purchase plan
|
|
|
830,000
|
|
|
209,000
|
|
|
170,000
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,532,000)
|
|
|
(4,915,000)
|
|
|
848,000
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(8,244,000)
|
|
|
6,181,000
|
|
|
(1,686,000)
|
|
Cash and cash equivalents at beginning of period
|
|
|
22,668,000
|
|
|
16,487,000
|
|
|
18,173,000
|
|
Cash and cash equivalents at end of period
|
|
$
|
14,424,000
|
|
$
|
22,668,000
|
|
$
|
16,487,000
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
111,000
|
|
$
|
179,000
|
|
$
|
203,000
|
|
Income taxes
|
|
|
2,750,000
|
|
|
1,875,000
|
|
|
949,000
|
|
Supplemental disclosures of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance of notes payable related to business acquisitions
|
|
$
|
—
|
|
$
|
4,569,000
|
|
$
|
4,250,000
|
|
Issuance of common stock related to business acquisitions
|
|
|
3,100,000
|
|
|
2,228,000
|
|
|
1,485,000
|
|
Contingent consideration related to business acquisitions
|
|
|
5,400,000
|
|
|
—
|
|
|
5,178,000
|
|
Other payable for working capital adjustment
|
|
|
113,000
|
|
|
—
|
|
|
—
|
|
Equipment acquired under capital leases
|
|
|
294,000
|
|
|
373,000
|
|
|
420,000
|
|
See accompanying notes to consolidated financial statements.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years 2017, 2016 and 2015
1. ORGANIZATION AND OPERATIONS OF THE COMPAN
Y
Nature of Business
Willdan Group, Inc. and subsidiaries (“Willdan Group” or the “Company”) is a provider of professional technical and consulting services, including comprehensive energy efficiency services, for utilities, private industry, and public agencies at all levels of government, primarily in New York and California. The Company also has operations in Arizona, Connecticut, Colorado, Florida, Illinois, Kansas, Nevada, New Jersey, Ohio, Oregon, Texas, Utah, Washington and Washington, D.C. The Company enables its clients to provide a wide range of specialized services without having to incur and maintain the overhead necessary to develop staffing in-house. The Company provides a broad range of complementary services including energy efficiency and sustainability, engineering, construction management and planning, economic and financial consulting, and national preparedness and interoperability. The Company’s clients primarily consist of public and governmental agencies, including cities, counties, public utilities, redevelopment agencies, water districts, school districts and universities, state agencies, federal agencies, a variety of other special districts and agencies, private utilities and industry and tribal governments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Willdan Group, Inc. and its wholly-owned subsidiaries, Willdan Energy Solutions (“WES”), Willdan Engineering, Public Agency Resources, Willdan Financial Services and Willdan Homeland Solutions and their respective subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for variable interest entities in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). Under ASC 810, a variable interest entity (“VIE”) is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights. If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE. In accordance with ASC 810, the Company performs ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE.
As of December 29, 2017, the Company had one VIE — Genesys Engineering, P.C. (“Genesys”). Pursuant to New York law, the Company does not own capital stock of Genesys and does not have control over the professional decision making of Genesys’s engineering services. The Company, however, has entered into an administrative services agreement with Genesys pursuant to which WES, the Company’s wholly-owned subsidiary, will provide Genesys with ongoing administrative, operational and other non-professional support services. The Company manages Genesys and has the power to direct the activities that most significantly impact Genesys’s performance, in addition to being obligated to absorb expected losses from Genesys. Accordingly, the Company is the primary beneficiary of Genesys and consolidates Genesys as a VIE.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Management also concluded there is no noncontrolling interest related to the consolidation of Genesys because management determined that (i) the shareholder of Genesys does not have more than a nominal amount of equity investment at risk, (ii) WES absorbs the expected losses of Genesys through its deferral of Genesys’s service fees owed to WES and the Company has, since entering into the administrative services agreement, had to continuously defer service fees for Genesys, and (iii) the Company believes Genesys will continue to have a shortfall on payment of its service fees for the foreseeable future, leaving no expected residual returns for the shareholder. For more information regarding Genesys, see Note 3 “Business Combinations.”
Fiscal Years
The Company operates and reports its annual financial results based on 52 or 53-week periods ending on the Friday closest to December 31, with consideration of business days. The Company operates and reports its quarterly financial results based on the 13-week period ending on the Friday closest to March 31, June 30 and September 30 and the 13 or 14-week period ending on the Friday closest to December 31, as applicable, with consideration of business days. Fiscal years 2017, 2016 and 2015 contained 52 weeks. All references to years in the notes to consolidated financial statements represent fiscal years.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
December 30,
|
|
|
|
2017
|
|
2016
|
|
BMO Harris Bank Master Control Operating Account
|
|
$
|
14,414,000
|
|
$
|
22,658,000
|
|
Cash on hand in business checking accounts
|
|
|
10,000
|
|
|
10,000
|
|
|
|
$
|
14,424,000
|
|
$
|
22,668,000
|
|
The Company from time to time may be exposed to credit risk with its bank deposits in excess of the FDIC insurance limits and with uninsured money market investments. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Fair Value of Financial Instruments
As of December 29, 2017 and December 30, 2016, the carrying amounts of the Company's cash and cash equivalents, accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, other receivables, prepaid expenses and other current assets, accounts payable, accrued liabilities and billings in excess of costs and estimated earnings on uncompleted contracts, approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. The carrying amounts of debt obligations approximate their fair values since the terms are comparable to terms currently offered by local lending institutions for loans of similar terms to companies with comparable credit risk.
Segment Information
Willdan Group, Inc. (“WGI”) is a holding company with six wholly owned subsidiaries. The Company presents segment information externally consistent with the manner in which the Company’s chief operating decision maker reviews information to assess performance and allocate resources. WGI performs administrative functions on behalf of its subsidiaries, such as treasury, legal, accounting, information systems, human resources and certain business
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
development activities, and earns revenue that is only incidental to the activities of the enterprise. As a result, WGI does not meet the definition of an operating segment. Three of the six WGI subsidiaries are aggregated into one reportable segment as they have similar economic characteristics including the nature of services, the methods used to provide services and the type of customers. The remaining three subsidiaries each comprise separate reporting segments. See Note 13 “—Segment Information” below.
Off‑Balance Sheet Arrangements
Other than operating lease commitments, the Company does not have any off‑balance sheet financing arrangements or liabilities. In addition, the Company’s policy is not to enter into derivative instruments, futures or forward contracts. Finally, the Company does not have any majority‑owned subsidiaries or any interests in, or relationships with, any special‑purpose entities that are not included in the consolidated financial statements.
Contract Accounting
The Company enters into contracts with its clients that contain various types of pricing provisions, including fixed price, time-and-materials, unit-based and service-related provisions. The following table reflects the Company’s four reportable segments and the types of contracts that each most commonly enters into for revenue generating activities.
|
|
|
Types of Contract
|
Segment
|
(Revenue Recognition Method)
|
Energy Efficiency Services
|
Time-and-materials, unit-based and fixed price
(percentage-of-completion method)
|
Engineering Services
|
Time-and-materials, unit-based and fixed price
(percentage-of-completion method)
|
Public Finance Services
|
Service-related contracts
(proportional performance method)
|
Homeland Security Services
|
Service-related contracts
(proportional performance method)
|
Revenue on fixed price contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs (primarily exclusive of depreciation and amortization costs) incurred to date to estimated total direct costs at completion. Many of the Company’s fixed price contracts involve a high degree of subcontracted fixed price effort and are relatively short in duration, thereby lowering the risks of not properly estimating the percent complete. Revenue on time-and-materials and unit-based contracts is recognized as the work is performed in accordance with the specific rates and terms of the contract. The Company recognizes revenues for time-and-materials contracts based upon the actual hours incurred during a reporting period at contractually agreed upon rates per hour and also includes in revenue all reimbursable costs incurred during a reporting period for which the Company has risk or on which the fee was based at the time of bid or negotiation. Certain of the Company’s time-and-materials contracts are subject to maximum contract values and, accordingly, revenue under these contracts is generally recognized under the percentage-of-completion method, consistent with fixed price contracts. Revenue on contracts that are not subject to maximum contract values is recognized based on the actual number of hours the Company spends on the projects plus any actual out-of-pocket costs of materials and other direct incidental expenditures that the Company incurs on the projects. In addition, revenue from overhead percentage recoveries and earned fees are included in revenue. Revenue is recognized as the related costs are incurred. For unit-based contracts, the Company recognizes the contract price of units of a basic production product as revenue when the production product is delivered during a period. Revenue for amounts that have
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
been billed but not earned is deferred and such deferred revenue is referred to as billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets.
Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimate, for contracts that are recognized under the percentage-of-completion method, indicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in dispute are evaluated as claims. Costs related to un-priced change orders are expensed when incurred and recognition of the related contract revenue is based on an evaluation of the probability of recovery of the costs. Estimated profit is recognized for un-priced change orders if realization of the expected price of the change order is probable.
The Company considers whether its contracts require combining for revenue recognition purposes. If certain criteria are met, revenues for related contracts may be recognized on a combined basis. With respect to the Company’s contracts, it is rare that such criteria are present. The Company may enter into certain contracts which include separate phases or elements. If each phase or element is negotiated separately based on the technical resources required and/or the supply and demand for the services being provided, the Company evaluates if the contracts should be segmented. If certain criteria are met, the contracts would be segmented which could result in revenues being assigned to the different elements or phases with different rates of profitability based on the relative value of each element or phase to the estimated total contract revenue.
Applying the percentage-of-completion method of recognizing revenue requires the Company to estimate the outcome of its long-term contracts. The Company forecasts such outcomes to the best of its knowledge and belief of current and expected conditions and its expected course of action. Differences between the Company's estimates and actual results often occur resulting in changes to reported revenue and earnings. Such changes could have a material effect on future consolidated financial statements. The Company did not have material revisions in estimates for contracts recognized using the percentage-of-completion method for any of the periods presented in the accompanying consolidated financial statements.
Service-related contracts, including operations and maintenance services and a variety of technical assistance services, are accounted for over the period of performance, in proportion to the cost of performance. Award and incentive fees are recorded when they are fixed and determinable and consider customer contract terms.
Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connection with revenue producing projects. Direct costs of contract revenue also include production expenses, subcontractor services and other expenses that are incurred in connection with revenue producing projects.
Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts. Such costs are included in general and administrative expenses. Additionally, payroll taxes, bonuses and employee benefit costs for all Company personnel are included in general and administrative expenses in the accompanying consolidated statements of operations since no allocation of these costs is made to direct costs of contract revenue. No allocation of facilities costs is made to direct costs of contract revenue. Other companies may classify as direct costs of contract revenue some of the costs that the Company classifies as general and administrative costs. The Company expenses direct costs of contract revenue when incurred.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Included in revenue and costs are all reimbursable costs for which the Company has the risk or on which the fee was based at the time of bid or negotiation. No revenue or cost is recorded for costs in which the Company acts solely in the capacity of an agent and has no risks associated with such costs.
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon a review of all outstanding amounts on a quarterly basis. Management determines allowances for doubtful accounts through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience. The Company’s credit risk is minimal with governmental entities and large public utilities, but disputes may arise related to these receivable amounts. Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivables previously written off are recorded when received.
Retainage is included in accounts receivable in the accompanying consolidated financial statements. Retainage represents the billed amount that is retained by the customer, in accordance with the terms of the contract, generally until performance is substantially complete. At December 29, 2017 and December 30, 2016, the Company had retained accounts receivable of approximately $8.6 million and $5.2 million, respectively.
General and Administrative Expenses
General and administrative expenses include the costs of the marketing and support staff, other marketing expenses, management and administrative personnel costs, payroll taxes, bonuses and employee benefits for all of the Company’s employees and the portion of salaries and wages not allocated to direct costs of contract revenue for those employees who provide the Company’s services. General and administrative expenses also include facility costs, depreciation and amortization, professional services, legal and accounting fees and administrative operating costs. Within general and administrative expenses, “Other” includes expenses such as provision for billed or unbilled receivables, professional services, legal and accounting, computer costs, travel and entertainment, marketing costs and acquisition costs. The Company expenses general and administrative costs when incurred.
Leases
All of the Company’s office leases are classified as operating leases and rent expense is included in facilities expense in the accompanying consolidated statements of operations. Some of the lease terms include rent concessions and rent escalation clauses, all of which are taken into account in computing minimum lease payments. Minimum lease payments are recognized on a straight‑line basis over the minimum lease term. The excess of rent expense recognized over the amounts contractually due pursuant to the underlying leases is reflected as a liability in the accompanying consolidated balance sheets. The cost of improvements that the Company makes to the leased office space is capitalized as leasehold improvements. The Company is subject to non‑cancellable leases for offices or portions of offices for which use has ceased. For each of these abandoned leases, the present value of the future lease payments, net of estimated sublease payments, along with any unamortized tenant improvement costs, are recognized as lease abandonment expense in the Company’s consolidated statements of operations with a corresponding liability in the Company’s consolidated balance sheets.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment under capital leases is stated at the present value of the minimum lease payments as of the acquisition date. Depreciation and amortization on equipment are calculated using the straight‑line method over estimated useful lives of
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
two to five years. Leasehold improvements and assets under capital leases are amortized using the straight‑line method over the shorter of estimated useful lives or the term of the related lease.
Following are the estimated useful lives used to calculate depreciation and amortization:
|
|
|
|
|
Category
|
|
Estimated Useful Life
|
|
Furniture and fixtures
|
|
5
|
years
|
|
Computer hardware
|
|
2
|
years
|
|
Computer software
|
|
3
|
years
|
|
Automobiles and trucks
|
|
3
|
years
|
|
Field equipment
|
|
5
|
years
|
|
Long-lived assets
Long-lived assets, such as equipment, leasehold improvements and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of costs over fair value of the assets acquired. The Company completes its annual testing of goodwill as of the last day of the first month of its fourth fiscal quarter each year to determine whether there is impairment. Goodwill, which has an indefinite useful life, is not amortized, but instead tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. Impairment losses for reporting units are recognized to the extent that a reporting unit’s carrying amount exceeds its fair value.
Accounting for Claims Against the Company
The Company accrues an undiscounted liability related to claims against it for which the incurrence of a loss is probable and the amount can be reasonably estimated. The Company discloses the amount accrued and an estimate of any reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to be misleading. The Company does not accrue liabilities related to claims when the likelihood that a loss has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. Losses related to recorded claims are included in general and administrative expenses.
Determining probability and estimating claim amounts is highly judgmental. Initial accruals and any subsequent changes in the Company’s estimates could have a material effect on its consolidated financial statements.
Stock Options
The Company accounts for stock options under the fair value recognition provisions of the accounting standard entitled “
Compensation—Stock Compensation.
” This standard requires the measurement of compensation cost at the grant date, based upon the estimated fair value of the award, and requires amortization of the related expense over the employee’s requisite service period.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Business Combinations
The acquisition method of accounting for business combinations requires the Company to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which the Company may adjust the provisional amounts recognized for a business combination based upon new information about facts that existed on the business combination date).
Under the acquisition method of accounting, the Company recognizes separately from goodwill the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in an acquiree, at the acquisition date fair value. The Company measures goodwill as of the acquisition date as the excess of consideration transferred over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Costs that the Company incurs to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration. The Company charges these acquisition costs to general and administrative expense as they are incurred.
The Company completed the acquisition of all of the outstanding shares of Integral Analytics, Inc. (“Integral Analytics”) on July 28, 2017. In connection with that acquisition, the Company will pay up to $30.0 million in a combination of cash and stock and including certain earn-out payments. For further discussion of the acquisition of Integral Analytics, see Note 3 “—Business Combinations” below.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities, subject to a judgmental assessment of the recoverability of deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more-likely-than-not that some of the deferred tax assets may not be realized. Significant judgment is applied when assessing the need for valuation allowances. Areas of estimation include the Company’s consideration of future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, the Company would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. On December 22, 2017, the Tax Act was enacted into law, which among other items, lowered the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of the Tax Act, the Company recorded a one-time decrease in deferred tax expense of $1.3 million for the fiscal quarter ended December 29, 2017 to account for the remeasurement of the Company’s deferred tax assets and liabilities on the enactment date. The Company will continue to analyze the impacts of the Tax Act and, if necessary, record any further adjustments to its deferred tax assets and liabilities in future periods.
During each fiscal year, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets. For fiscal years 2017 and 2016, the Company ultimately determined that it was more-likely-than-not that the entire California net operating loss will not be utilized prior to expiration. Significant pieces of objective evidence evaluated included the Company’s history of utilization of California net operating losses in prior years for each of the Company’s subsidiaries, as well as the Company’s forecasted amount of net operating loss utilization for certain members of the combined group. As a result,
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
we recorded a valuation allowance in the amount of $87,000 and $72,000 at the end of fiscal year 2017 and 2016, respectively, related to California net operating losses.
For acquired business entities, if the Company identifies changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and the Company records the offset to goodwill. The Company records all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
Operating Cycle
In accordance with industry practice, amounts realizable and payable under contracts that extend beyond one year are included in current assets and liabilities.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
Statement of Cash Flows
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15,
Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides for retrospective application for all periods presented. The Company does not believe the guidance will have a material impact on its consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which clarifies existing accounting literature relating to how and when revenue is recognized by an entity. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In doing so, an entity will need to exercise a greater degree of
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration which may include change orders and claims to include in the transaction price, and allocating the transaction price to each separate performance obligation. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In August 2015, the FASB issued Update 2015-14, which defers the implementation of ASU 2014-09 for one year from the initial effective date. ASU 2014-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017, and is to be applied either retrospectively or using the cumulative effect transition method, with early adoption not permitted.
In December 2016, the FASB issued ASU 2016-20, Revenue from Contracts with Customers (Topic 606), which further clarifies the current revenue recognition guidance. This update is intended to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. The Company will adopt the requirements of the new standard effective beginning fiscal year 2018, and the Company expects to use the Modified Retrospective method
.
In 2017, the Company established an implementation team which included senior managers from its finance and accounting group. The implementation team has evaluated the impact of adopting the new standard on the Company’s contracts expected to be uncompleted as of December 30, 2017 (the date of adoption). The evaluation included reviewing the Company’s accounting policies and practices to identify differences that would result from applying the requirements of the new standard. The Company has identified and made changes to its processes, systems and controls to support recognition and disclosure under the new standard. The implementation team has worked closely with various professional consultants and attended several formal conferences and seminars to conclude on certain interpretative issues.
Under the new standard, the Company will continue to recognize engineering and construction contract revenue over time using the percentage of completion method, based primarily on contract cost incurred to date compared to total estimated contract cost. Revenue on the vast majority of the Company’s contracts will continue to be recognized over time because of the continuous transfer of control to the customer. A relatively small portion of the Company’s contract portfolio will change from recognizing revenue from design and construction management phases separately to recognizing revenue as a single performance obligation, which will result in a more consistent recognition of revenue and margin over the term of the contract. Revenue recognition for software licenses issued by the Integral Analytics unit will change from amortizing the gross license revenue over the license period to recognizing the full amount of most non-cancellable licenses upon acceptance of the software by the customer, in recognition of the fulfillment of the performance obligation at that point in time. Certain additional performance obligations beyond the base software license may be separated from the gross license fee and amortized over time. The Company does not believe the adoption of the guidance will have a material impact on its consolidated financial statements.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company elected to early adopt ASU 2016-09 on a prospective basis in 2016. The Company has elected to early adopt ASU 2016-09 on a prospective basis, which resulted in a decrease to tax expense of approximately $1.6 million for the fiscal year ended December 29, 2017.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.
Proposed Accounting Standards
A variety of proposed or otherwise potential accounting standards are currently being studied by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, the Company has not yet determined the effect, if any, that the implementation of such proposed standards would have on its consolidated financial statements.
3. BUSINESS COMBINATIONS
Acquisition of Integral Analytics
On July 28, 2017, the Company and the Company’s wholly-owned subsidiary WES acquired all of the outstanding shares of Integral Analytics, a data analytics and software company, pursuant to the Stock Purchase Agreement, dated July 28, 2017 (the “Purchase Agreement”), by and among Willdan Group, WES, Integral Analytics, the stockholders of Integral Analytics (the “IA Stockholders”) and the Sellers’ Representative (as defined therein). The Company believes the addition of Integral Analytics’ capabilities will improve the ability to target locational energy savings and microgrids and can provide a clear technical advantage on energy efficiency programs.
Pursuant to the terms of the Purchase Agreement, WES will pay the IA Stockholders a maximum purchase price of $30.0 million, consisting of (i) $15.0 million in cash paid at closing (subject to certain post-closing tangible net asset value adjustments), (ii) 90,611 shares of common stock, par value $0.01 per share, of Willdan Group, Inc. (“Common Stock”) issued at closing, equaling $3.0 million, calculated based on the volume-weighted average price of shares of Common Stock for the ten trading days immediately prior to, but not including, the closing date of the acquisition of Integral Analytics (the “Closing Date”) and (iii) up to $12.0 million in cash for a percentage of sales attributable to the business of Integral Analytics during the three years after the Closing Date, as more fully described below (such potential payments of up to $12.0 million, being referred to as “Earn-Out Payments” and $12.0 million in respect thereof, being referred to as the “Maximum Payout”). The Company used cash on hand for the $15.0 million cash payment paid at closing.
The size of the Earn-Out Payments to be paid will be determined based on two factors. First, the IA Stockholders will receive 2% of gross contracted revenue for new work sold by the Company in close collaboration with Integral Analytics during the three years following the Closing Date (the “Earn-Out Period”). Second, the IA Stockholders will receive 20% of the gross contracted revenue specified in each executed and/or effective software licensing agreement, entered into by the Company or one of its affiliates that contains pricing either equal to or greater than standard pricing, of software offered for licensing by Integral Analytics during the Earn-Out Period. The amounts due to the IA Stockholders pursuant to these two factors will in no event, individually or in the aggregate, exceed the Maximum Payout. Earn-Out Payments will be made in quarterly installments for each year of the Earn-Out Period. For the purposes of both of these factors credit will be given to Integral Analytics for the gross contracted revenue in the quarter in which the contract/license is executed, regardless of when the receipt of payment thereunder is expected. The
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
amount of gross contracted revenue for contracts with unfunded ceilings or of an indeterminate contractual value will be mutually agreed upon. Further, in the event of a change of control of WES during the Earn-Out Period, any then-unpaid amount of the Maximum Payout will be paid promptly to the IA Stockholders, even if such Earn-Out Payments have not been earned at that time. The Company has agreed to certain covenants regarding the operation of Integral Analytics during the Earn-Out Period, of which a violation by the Company could result in damages being paid to the IA Stockholders in respect of the Earn-Out. In addition, the Earn-Out Payments will be subject to certain subordination provisions in favor of BMO, the Company’s senior secured lender.
WES has also established a bonus pool for the employees of Integral Analytics to be paid based on Integral Analytics’ performance against certain targets.
The acquisition was accounted for as a business combination in accordance with ASC 805. Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair value with the excess allocated to goodwill. Goodwill represents the value the Company expects to achieve through the operational synergies and the expansion into new markets. The Company estimates that the entire $16.4 million of goodwill resulting from the acquisition will be tax deductible. Consideration for the acquisition includes the following preliminary information:
|
|
|
|
|
|
Integral Analytics
|
Cash paid
|
|
$
|
15,000,000
|
Other payable for working capital adjustment
|
|
|
113,000
|
Issuance of common stock
|
|
|
3,100,000
|
Contingent consideration
|
|
|
5,400,000
|
Total consideration
|
|
$
|
23,613,000
|
The following table summarizes the preliminary amounts for the acquired assets recorded at their estimated fair value as of the acquisition date:
|
|
|
|
|
|
Integral Analytics
|
Current assets
|
|
$
|
626,000
|
Non-current assets
|
|
|
2,000
|
Cash
|
|
|
397,000
|
Property, plant and equipment
|
|
|
5,000
|
Liabilities
|
|
|
(946,000)
|
Customer relationships
|
|
|
1,700,000
|
Tradename
|
|
|
1,040,000
|
Developed technology
|
|
|
2,760,000
|
In-process technology
|
|
|
1,650,000
|
Goodwill
|
|
|
16,379,000
|
Net assets acquired
|
|
$
|
23,613,000
|
As of December 29, 2017, the Company obtained further information on the valuation of the assets acquired and liabilities assumed related to the acquisition of all the outstanding shares of Integral Analytics and, in accordance with the authoritative guidance for business combinations, recorded purchase price adjustments as of the acquisition date to increase the fair values of intangible assets by $0.2 million, decrease other payable for working capital adjustment by $1.8 million and a decrease in accounts receivables by $0.1 million. These adjustments to the provisional purchase price allocations decreased goodwill by $1.9 million.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
As of December 29, 2017, the Company has contingent consideration payable of $5.6
million
related to the acquisition of Integral Analytics, which includes $0.3 million of accretion (net of fair value adjustments) related to the contingent consideration. Contingent consideration is subject to change for each reporting period through settlement. The Company measures the contingent earn-out liabilities at fair value on the date of acquisition and on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. The Company uses a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period, and the probability outcome percentages assigned to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings
. There were no changes to the ranges of estimated payments or discount rates.
Acquisition related costs of $0.2 million are included in other general and administrative expenses in the consolidated statements of operations for the fiscal year ended December 29, 2017.
The following unaudited pro forma financial information for the three and twelve months ended December 29, 2017 and December 30, 2016 assumes that acquisition of all the outstanding shares of Integral Analytics occurred on January 2, 2016 as follows:
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
December 29,
|
|
December 30,
|
In thousands (except per share data)
|
|
2017
|
|
2016
|
Pro forma revenue
|
|
$
|
275,622
|
|
$
|
227,504
|
|
|
|
|
|
|
|
Pro forma income from operations
|
|
|
11,991
|
|
|
10,107
|
Pro forma net income
|
|
$
|
10,345
|
|
$
|
7,627
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
1.21
|
|
$
|
0.92
|
Diluted
|
|
$
|
1.13
|
|
$
|
0.88
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
|
8,541
|
|
|
8,310
|
Diluted
|
|
|
9,155
|
|
|
8,656
|
This pro forma supplemental information does not purport to be indicative of what the Company’s operating results would have been had this transaction occurred on January 2, 2016 and may not be indicative of future operating results.
During the fiscal year ended December 29, 2017, the acquisition of all of the outstanding shares of Integral Analytics contributed $1.1 million in revenue and $1.1 million of loss from operations.
Acquisition of Substa
ntially All of the Assets of Genesys
On March 4, 2016, the Company and the Company’s wholly-owned subsidiary, WES acquired substantially all of the assets of Genesys and assumed certain specified liabilities of Genesys (collectively, the “Purchase”) pursuant to an Asset Purchase and Merger Agreement, dated as of February 26, 2016 (the “Agreement”), by and among Willdan Group,
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Inc., WES, WESGEN (as defined below), Genesys and Ronald W. Mineo (“Mineo”) and Robert J. Braun (“Braun” and, together with Mineo, the “Genesys Shareholders”). On March 5, 2016, pursuant to the terms of the Agreement, WESGEN, Inc., a non-affiliated corporation (“WESGEN”), merged (the “Merger” and, together with the Purchase, the “Acquisition”) with Genesys, with Genesys remaining as the surviving corporation. Genesys was acquired to strengthen the Company’s power engineering capability in the northeastern U.S., and also to increase client exposure and experience with universities.
Pursuant to the terms of the Agreement, WES or WESGEN, as applicable, paid the Genesys Shareholders an aggregate purchase price (the “Purchase Price”) of approximately $15.1 million, including post-closing working capital and tax adjustments. The Purchase Price consisted of (i) $6.0 million in cash, paid at closing, and $2.9 million paid in cash after closing for working capital and tax adjustments, (ii) 255,808 shares of common stock, par value $0.01 per share (the “Common Stock”), with a fair value on the date of closing of $2.2 million, (iii) $4.6 million in cash, payable in twenty-four (24) equal monthly installments beginning on March 26, 2016 (the “Installment Payments”), and (iv) offset by a $0.6 million receivable paid to WES for working capital adjustments. Until the third anniversary of the Closing Date (the “Closing Date”), the Genesys Shareholders are prohibited from transferring or disposing of any Common Stock received in connection with the Acquisition.
The Agreement contains customary representations and warranties regarding the Company, WES, WESGEN, Genesys and the Genesys Shareholders, indemnification provisions and other provisions customary for transactions of this nature. Pursuant to the terms of the Agreement, the Company and WES also provided guarantees to the Genesys Shareholders which guarantee certain of WESGEN’s and Genesys’s obligations under the Agreement, including the Installment Payments.
Genesys has a sole shareholder who is a licensed engineer in New York (the “Shareholder”).
The Company used cash on hand to pay the $8.9 million due to the Genesys Shareholders at closing.
Genesys continues to be a professional corporation organized under the laws of the State of New York, wholly-owned by one or more licensed engineers. Pursuant to New York law, the Company does not own capital stock of Genesys. The Company has entered into an agreement with the Shareholder of Genesys pursuant to which the Shareholder will be prohibited from selling, transferring or encumbering the Shareholder’s ownership interest in Genesys without the Company’s consent. Notwithstanding the Company’s rights regarding the transfer of Genesys’s stock, the Company does not have control over the professional decision making of Genesys’s engineering services. The Company has entered into an administrative services agreement with Genesys pursuant to which WES will provide Genesys with ongoing administrative, operational and other non-professional support services.
Genesys pays WES a service fee, which consists of all of the costs incurred by WES to provide the administrative services to Genesys plus ten percent of such costs, as well as any other costs that relate to professional service supplies and personnel costs. As a result of the administrative services agreement, the Company absorbs the expected losses of Genesys through its deferral of Genesys’s service fees owed to WES.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
The acquisition was accounted for as a business combination in accordance with ASC 805. Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair value with the excess allocated to goodwill. Goodwill represents the value the Company expects to achieve through the operational synergies and the expansion into new markets. The Company estimates that the entire $6.2 million of goodwill resulting from the acquisition will be tax deductible. Consideration for the acquisition includes the following:
|
|
|
|
|
|
|
|
Genesys
|
|
|
Cash paid, net of cash acquired
|
|
$
|
8,857,000
|
|
|
Other receivable for working capital adjustment
|
|
|
(604,000)
|
|
|
Issuance of common stock
|
|
|
2,228,000
|
|
|
Deferred purchase price, payable in 24 monthly installments
|
|
|
4,569,000
|
|
|
Total consideration
|
|
$
|
15,050,000
|
|
|
The following table summarizes the amounts for the acquired assets recorded at their estimated fair value as of the acquisition date:
|
|
|
|
|
|
|
|
Genesys
|
|
|
Current assets
|
|
$
|
14,952,000
|
|
|
Non-current assets
|
|
|
36,000
|
|
|
Cash
|
|
|
101,000
|
|
|
Property, plant and equipment
|
|
|
117,000
|
|
|
Liabilities
|
|
|
(12,643,000)
|
|
|
Customer relationships
|
|
|
3,260,000
|
|
|
Backlog
|
|
|
1,050,000
|
|
|
Tradename
|
|
|
1,690,000
|
|
|
Non-compete agreements
|
|
|
320,000
|
|
|
Goodwill
|
|
|
6,167,000
|
|
|
Net assets acquired
|
|
$
|
15,050,000
|
|
|
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
The following unaudited pro forma financial information for the fiscal year ended December 30, 2016 and January 1, 2016 assumes the acquisition of substantially all of the assets of Genesys occurred on January 2, 2015 as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
January 1,
|
|
In thousands (except per share data)
|
|
2016
|
|
2016
|
|
Pro forma revenue
|
|
$
|
222,914
|
|
$
|
167,479
|
|
|
|
|
|
|
|
|
|
Pro forma income from operations
|
|
|
12,504
|
|
|
7,755
|
|
Pro forma net income
|
|
$
|
8,907
|
|
$
|
4,498
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.08
|
|
$
|
0.57
|
|
Diluted
|
|
$
|
1.04
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
8,219
|
|
|
7,834
|
|
Diluted
|
|
|
8,565
|
|
|
8,113
|
|
This pro forma supplemental information does not purport to be indicative of what the company’s operating results would have been had these transactions occurred on January 2, 2015 and may not be indicative of future operating results.
During the fiscal year ended December 29, 2017, the acquisition of substantially all of the assets of Genesys contributed $64.7 million in revenue and $1.7 million of income from operations.
Acquisition related costs of $71,000 and $0.2 million are included in other general and administrative expense in the consolidated statements of operations for the fiscal years ended December 30, 2016 and January 1, 2016, respectively. There were no acquisition costs related to Genesys recorded during the fiscal year ended December 29, 2017.
Acquisition of Substantially All of the Assets of 360 Energy Engineers and the Acquisitions of Abacus and Economists LLC
On January 15, 2015, the Company and its wholly-owned subsidiary, WES completed two separate acquisitions. The Company and WES acquired all of the outstanding shares of Abacus Resource Management Company (“Abacus”), an Oregon-based energy engineering company. In addition, the Company and WES separately acquired substantially all of the assets of 360 Energy Engineers, LLC (“360 Energy”), a Kansas-based energy and engineering energy management consulting company.
Pursuant to the terms of the Stock Purchase Agreement, dated as of January 15, 2015, by and between the Company, WES, Abacus and the selling shareholders of Abacus (the “Abacus Shareholders”), WES will pay the Abacus Shareholders a maximum purchase price of $6.1 million, consisting of (i) $2.5 million in cash which was paid at closing, with the balance of $0.6 million paid after closing, (ii) 75,758 shares of Common Stock, par value $0.01 per share, of the Company (“Common Stock”) with a fair value of $0.9 million which were issued at closing, (iii) $1.25 million aggregate
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
principal amount of promissory notes issued to the Abacus Shareholders at closing and (iv) up to $0.8 million in cash, based on the achievement of certain financial targets by Abacus at the end of the Company’s 2015 and 2016 fiscal years. As of December 30, 2016, Abacus did not meet its financial targets, and therefore, the Company was not required to pay the additional $0.8 million in cash; such amount was recorded in our consolidated statement of operations as a reduction of interest accretion expense.
Pursuant to the terms of the Asset Purchase Agreement, dated January 15, 2015, by and between the Company, WES and 360 Energy, WES agreed to pay 360 Energy a maximum purchase price of $15.0 million, consisting of (i) $4.9 million in cash which was paid at closing, (ii) 47,348 shares of Common Stock with a fair value of $0.6 million which were issued at closing, (iii) $3.0 million aggregate principal amount of promissory note issued to 360 Energy at closing and (iv) up to $6.5 million in cash, based on the achievement of certain financial targets by WES’s division made up of the assets acquired from, and the former employees of 360 Energy at the end of the Company’s 2015, 2016 and 2017 fiscal years.
The Company also
provided a guaranty to 360 Energy which guarantees WES’s obligations under the promissory note issued to 360 Energy.
The Company later amended the Asset Purchase Agreement with 360 Energy to extend the term of the three-year performance goal for an additional year to the end of the Company’s 2018 fiscal year to allow 360 Energy to expand into additional geographical territories. As a result of this amendment, the Company increased contingent consideration by $0.3 million. As of December 29, 2017, 360 Energy has earned $1.5 million based on achieving some of its financial targets.
The fair value of the 75,758 and 47,348 shares of common stock issued as part of the consideration paid for Abacus ($0.9 million) and 360 Energy ($0.6 million) respectively, was determined on the basis of the price of the Company’s common shares on the acquisition date.
To finance the acquisitions of Abacus and substantially all of the assets of 360 Energy, the Company borrowed $2.0 million under its prior delayed draw term loan facility. The Company used cash on hand to pay the remaining $5.4 million due at closing.
On April 3, 2015, the Company’s wholly-owned subsidiary, Willdan Financial Services (“WFS”) acquired substantially all of the assets of Economists.com, LLC (“Economists LLC”), a Texas-based economic analysis and financial solutions firm serving the municipal and public sectors. Pursuant to the terms of the Asset Purchase Agreement, dated April 3, 2015, by and between WFS and Economists LLC, WFS will pay Economists LLC a maximum purchase price of $1.1 million, consisting of (i) $0.5 million in cash which was paid at closing and (ii) up to $0.6 million in cash, based on the achievement of certain financial targets by the WFS division made up of the assets acquired from, and the former employees of Economists LLC at the end of the Company’s 2015, 2016 and 2017 fiscal years.
The Company used cash on hand to pay the $0.5 million due at closing. As of December 29, 2017, Economists LLC has earned
$0.2
million based on achieving some of its financial targets.
The acquisitions were accounted for as business combinations in accordance with ASC 805. Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair value with the excess allocated to goodwill. Goodwill represents the value the Company expects to achieve through the operational synergies and the
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
expansion of the Company into new markets. The Company estimates that the entire $16.
1
million of goodwill resulting from the acquisitions will be tax deductible. Consideration for the acquisitions includes the following:
|
|
360 Energy
|
|
Abacus
|
|
Economists
LLC
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
$
|
4,875,000
|
|
$
|
3,136,000
|
|
$
|
490,000
|
|
$
|
8,501,000
|
|
Issuance of common stock
|
|
|
571,000
|
|
|
913,000
|
|
|
—
|
|
|
1,484,000
|
|
Issuance of notes payable
|
|
|
3,000,000
|
|
|
1,250,000
|
|
|
—
|
|
|
4,250,000
|
|
Contingent consideration
|
|
|
4,221,000
|
|
|
589,000
|
|
|
368,000
|
|
|
5,178,000
|
|
Total consideration
|
|
$
|
12,667,000
|
|
$
|
5,888,000
|
|
$
|
858,000
|
|
$
|
19,413,000
|
|
The following table summarizes the amounts for the acquired assets and liabilities recorded at their estimated fair value as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360 Energy
|
|
Abacus
|
|
Economists
LLC
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired
|
|
$
|
—
|
|
$
|
332,000
|
|
$
|
—
|
|
$
|
332,000
|
|
Property, plant and equipment
|
|
|
166,000
|
|
|
78,000
|
|
|
—
|
|
|
244,000
|
|
Liabilities
|
|
|
—
|
|
|
(512,000)
|
|
|
—
|
|
|
(512,000)
|
|
License to bid
|
|
|
—
|
|
|
308,000
|
|
|
—
|
|
|
308,000
|
|
Backlog
|
|
|
158,000
|
|
|
161,000
|
|
|
29,000
|
|
|
348,000
|
|
Tradename
|
|
|
669,000
|
|
|
323,000
|
|
|
57,000
|
|
|
1,049,000
|
|
Non-compete agreements
|
|
|
860,000
|
|
|
128,000
|
|
|
23,000
|
|
|
1,011,000
|
|
Other assets, net
|
|
|
41,000
|
|
|
495,000
|
|
|
—
|
|
|
536,000
|
|
Goodwill
|
|
|
10,773,000
|
|
|
4,575,000
|
|
|
749,000
|
|
|
16,097,000
|
|
Net assets acquired
|
|
$
|
12,667,000
|
|
$
|
5,888,000
|
|
$
|
858,000
|
|
$
|
19,413,000
|
|
The acquisition date fair value of the intangible asset relating to tradenames was estimated using discounted cash flows based on the relief from royalty method.
The liabilities assumed were measured based on the estimated costs related to the remediation of an environmental liability associated with one of the construction projects that was acquired on the date of acquisition in accordance with ASC 450.
These assets are deemed to have a finite life. As of December 29, 2017, the Company has contingent consideration payable of $
4.5
million related to these acquisitions, which includes $21,000 of accretion (net of fair value adjustments) related to the contingent consideration. Contingent consideration is subject to change for each reporting period through settlement. The Company measures the contingent earn-out liabilities at fair value on the date of acquisition and on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. The Company uses a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period, and the probability outcome percentages assigned to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings
. There were no changes to the ranges of estimated payments or discount rates.
Acquisition related costs of $0.2 million and $0.3 million are included in other general and administrative expense in the consolidated statements of operations for the fiscal years ended January 1, 2016 and January 2, 2015, respectively.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
The following unaudited pro forma financial information for the fiscal years ended January 1, 2016 and January 2, 2015 assumes the acquisitions of Abacus and substantially all of the assets of 360 Energy occurred on December 28, 2013 as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 1,
|
|
January 2,
|
|
In thousands (except per share data)
|
|
2016
|
|
2015
|
|
Pro forma revenue
|
|
$
|
135,576
|
|
$
|
130,181
|
|
|
|
|
|
|
|
|
|
Pro forma income from operations
|
|
|
8,204
|
|
|
12,162
|
|
Pro forma net income
|
|
$
|
4,759
|
|
$
|
12,162
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
$
|
1.62
|
|
Diluted
|
|
$
|
0.59
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
7,834
|
|
|
7,488
|
|
Diluted
|
|
|
8,113
|
|
|
7,739
|
|
This pro forma supplemental information does not purport to be indicative of what the Company’s operating results would have been had these transactions occurred on December 28, 2013 and may not be indicative of future operating results.
During the fiscal year ended January 1, 2016, the acquisitions of Abacus, Economists LLC, and substantially all of the assets of 360 Energy contributed $23.8 million in revenue and $1.3 million of income from operations.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 29, 2017, the Company had $38.2 million of goodwill, which primarily relates to the Energy Efficiency Services reporting segment and the acquisitions of substantially all of the assets of Genesys and 360 Energy and the acquisitions of Integral Analytics and Abacus. The remaining goodwill is contained in the Public Finance Services reporting segment as a result of the acquisition of Economists LLC. The Company had goodwill outstanding in the amount of $21.9 million as of December 30, 2016. The changes in the carrying value of goodwill by reporting unit for the fiscal year ended December 29, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
Additions /
|
|
December 29,
|
|
|
2016
|
|
Adjustments
|
|
2017
|
Reporting Unit:
|
|
|
|
|
|
|
|
|
|
Energy Efficiency Services
|
|
$
|
21,198,000
|
|
$
|
16,237,000
|
|
$
|
37,435,000
|
Public Finance Services
|
|
|
749,000
|
|
|
—
|
|
|
749,000
|
|
|
$
|
21,947,000
|
|
$
|
16,237,000
|
|
$
|
38,184,000
|
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of December 29, 2017 and December 30, 2016, included in other intangible assets, net in the accompanying consolidated balance sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2017
|
|
December 30, 2016
|
|
|
|
|
|
Gross
|
|
Accumulated
|
|
Gross
|
|
Accumulated
|
|
Amortization
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
Period (yrs)
|
|
Backlog
|
|
$
|
1,398,000
|
|
$
|
989,000
|
|
$
|
1,398,000
|
|
$
|
639,000
|
|
5
|
|
Tradename
|
|
|
3,779,000
|
|
|
2,050,000
|
|
|
2,739,000
|
|
|
1,142,000
|
|
2.5 - 6.0
|
|
Non-compete agreements
|
|
|
1,331,000
|
|
|
745,000
|
|
|
1,331,000
|
|
|
463,000
|
|
4
|
|
License to bid
|
|
|
308,000
|
|
|
308,000
|
|
|
308,000
|
|
|
308,000
|
|
1
|
|
Developed Technology
|
|
|
2,760,000
|
|
|
144,000
|
|
|
—
|
|
|
—
|
|
8
|
|
In-process Research & Technology
|
|
|
1,650,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
10
|
|
Customer relationships
|
|
|
4,960,000
|
|
|
1,284,000
|
|
|
3,260,000
|
|
|
543,000
|
|
5.0 - 8.0
|
|
|
|
$
|
16,186,000
|
|
$
|
5,520,000
|
|
$
|
9,036,000
|
|
$
|
3,095,000
|
|
|
|
The C
ompany’s amortization expense for acquired identifiable intangible assets with finite useful lives was $2.4 million for the fiscal year ended December 29, 2017, and $1.9 million and $1.2 million for the fiscal years ended December 30, 2016 and January 1, 2016, respectively. Estimated amortization expense for acquired identifiable intangible assets for fiscal year 2018 and the succeeding years is as follows:
|
|
|
|
|
Fiscal year:
|
|
|
|
|
2018
|
|
$
|
2,847,000
|
|
2019
|
|
|
1,982,000
|
|
2020
|
|
|
1,570,000
|
|
2021
|
|
|
1,005,000
|
|
2022
|
|
|
896,000
|
|
Thereafter
|
|
|
2,366,000
|
|
|
|
$
|
10,666,000
|
|
At the time of acquisition, the Company estimates the fair value of the acquired identifiable intangible assets based upon the facts and circumstances related to the particular intangible asset. Inherent in such estimates are judgments and estimates of future revenue, profitability, cash flows and appropriate discount rates for any present value calculations. The Company preliminarily estimates the value of the acquired identifiable intangible assets and then finalizes the estimated fair values during the purchase allocation period, which does not extend beyond 12 months from the date of acquisition.
The Company tests its goodwill at least annually for possible impairment. The Company completes its annual testing of goodwill as of the last day of the first month of its fourth fiscal quarter each year to determine whether there is impairment. In addition to the Company’s annual test, it regularly evaluates whether events and circumstances have occurred that may indicate a potential impairment of goodwill. No impairment was recorded during the three-year period ended December 29, 2017.
5. EARNINGS PER SHARE (“EPS”)
Basic EPS is computed by dividing net income available to common stockholders by the weighted‑average number of common shares outstanding. Diluted EPS is computed by dividing net income by the weighted‑average
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
number of common shares outstanding and dilutive potential common shares for the period. Potential common shares include the weighted‑average dilutive effects of outstanding stock options and restricted stock awards using the treasury stock method.
The following table sets forth the number of weighted‑average common shares outstanding used to compute basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Net income
|
|
|
$
|
12,129,000
|
|
$
|
8,299,000
|
|
$
|
4,259,000
|
|
Weighted-average common shares outstanding
|
|
|
|
8,541,000
|
|
|
8,219,000
|
|
|
7,834,000
|
|
Effect of dilutive stock options and restricted stock awards
|
|
|
|
614,000
|
|
|
346,000
|
|
|
279,000
|
|
Weighted-average common shares outstanding-diluted
|
|
|
|
9,155,000
|
|
|
8,565,000
|
|
|
8,113,000
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$
|
1.42
|
|
$
|
1.01
|
|
$
|
0.54
|
|
Diluted
|
|
|
$
|
1.32
|
|
$
|
0.97
|
|
$
|
0.52
|
|
For the fiscal year ended December 29, 2017, 114,600 options were excluded from the calculation of dilutive potential common shares, compared to 322,200 and 314,500 options, for fiscal years 2016 and 2015, respectively. These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share for the respective periods. Accordingly, the inclusion of these options would have been anti‑dilutive.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
6. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 29, 2017 and December 30, 2016:
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
December 30,
|
|
|
|
2017
|
|
2016
|
|
Billed
|
|
$
|
30,250,000
|
|
$
|
25,909,000
|
|
Unbilled (1)
|
|
|
24,732,000
|
|
|
18,988,000
|
|
Contract retentions
|
|
|
8,560,000
|
|
|
5,161,000
|
|
|
|
|
63,542,000
|
|
|
50,058,000
|
|
Allowance for doubtful accounts
|
|
|
(369,000)
|
|
|
(785,000)
|
|
|
|
$
|
63,173,000
|
|
$
|
49,273,000
|
|
|
(1)
|
|
Unbilled portion represents costs and estimated earnings in excess of billings on uncompleted contracts which is presented separately from accounts receivable on the consolidated balance sheets.
|
The movements in the allowance for doubtful accounts consisted of the following for fiscal years 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Balance as of the beginning of the year
|
|
$
|
785,000
|
|
$
|
760,000
|
|
$
|
662,000
|
|
(Recovery of) provision for doubtful accounts
|
|
|
(189,000)
|
|
|
216,000
|
|
|
586,000
|
|
Write-offs of uncollectible accounts
|
|
|
(227,000)
|
|
|
(191,000)
|
|
|
(488,000)
|
|
Balance as of the end of the year
|
|
$
|
369,000
|
|
$
|
785,000
|
|
$
|
760,000
|
|
Billed accounts receivable represent amounts billed to clients that have yet to be collected. Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or accounts billed after the period end. Substantially all unbilled receivables as of December 29, 2017 and December 30, 2016 are or were expected to be billed and collected within twelve months of such date. Contract retentions represent amounts invoiced to clients where payments have been withheld pending the completion of certain milestones, other contractual conditions or upon the completion of the project. These retention agreements vary from project to project and could be outstanding for several months.
Allowances for doubtful accounts have been determined through specific identification of amounts considered to be uncollectible and potential write‑offs, plus a non‑specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience.
As of December 29, 2017, Dormitory Authority-State of New York (“DASNY”) accounted for 19% and Consolidated Edison of New York, Inc. (“Consolidated Edison”) accounted for 15% of outstanding receivables, as compared to Consolidated Edison accounting for 20% and DASNY accounting for 19% of the Company’s outstanding receivables as of December 30, 2016. For the fiscal year 2017, DASNY and Consolidated Edison represented 22% and 16%, respectively, of our consolidated contract revenue.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at December 29, 2017 and December 30, 2016:
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
December 30,
|
|
|
|
2017
|
|
2016
|
|
Furniture and fixtures
|
|
$
|
3,011,000
|
|
$
|
2,353,000
|
|
Computer hardware and software
|
|
|
8,355,000
|
|
|
7,686,000
|
|
Leasehold improvements
|
|
|
1,121,000
|
|
|
1,094,000
|
|
Equipment under capital leases
|
|
|
1,095,000
|
|
|
1,076,000
|
|
Automobiles, trucks, and field equipment
|
|
|
2,100,000
|
|
|
1,446,000
|
|
|
|
|
15,682,000
|
|
|
13,655,000
|
|
Accumulated depreciation and amortization
|
|
|
(10,376,000)
|
|
|
(9,144,000)
|
|
Equipment and leasehold improvements, net
|
|
$
|
5,306,000
|
|
$
|
4,511,000
|
|
Included in accumulated depreciation and amortization is $380,000 and $745,000 of amortization expense related to equipment held under capital leases in fiscal years 2017 and 2016, respectively.
8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 29, 2017 and December 30, 2016:
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
December 30,
|
|
|
|
2017
|
|
2016
|
|
Accrued bonuses
|
|
$
|
2,687,000
|
|
$
|
2,090,000
|
|
Accrued interest
|
|
|
5,000
|
|
|
1,000
|
|
Paid leave bank
|
|
|
2,533,000
|
|
|
2,129,000
|
|
Compensation and payroll taxes
|
|
|
1,859,000
|
|
|
2,006,000
|
|
Accrued legal
|
|
|
103,000
|
|
|
177,000
|
|
Accrued workers’ compensation insurance
|
|
|
305,000
|
|
|
81,000
|
|
Accrued rent
|
|
|
192,000
|
|
|
166,000
|
|
Employee withholdings
|
|
|
1,812,000
|
|
|
1,337,000
|
|
Client deposits
|
|
|
92,000
|
|
|
139,000
|
|
Accrued subcontractor costs
|
|
|
13,103,000
|
|
|
8,100,000
|
|
Other
|
|
|
602,000
|
|
|
2,823,000
|
|
Total accrued liabilities
|
|
$
|
23,293,000
|
|
$
|
19,049,000
|
|
9. EQUITY PLANS
As of December 29, 2017, the Company had two share‑based compensation plans, which are described below. The Company may no longer grant awards under the 2006 Stock Incentive Plan. The compensation expense that has been recognized for stock options and restricted stock awards issued under these plans was $2,426,000, $1,239,000 and $777,000 for fiscal years 2017, 2016 and 2015, respectively.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
2006 STOCK INCENTIVE PLAN
In June 2006, the Company’s board of directors adopted the 2006 Stock Incentive Plan (“2006 Plan”) and it received stockholder approval. The Company re‑submitted the 2006 Plan to its stockholders for post‑IPO approval at the 2007 annual meeting of the stockholders and it was approved. The 2006 Plan terminated in June 2016 and no additional awards were granted under the 2006 Plan after the Company’s shareholders approved the 2008 Plan (as defined below) in June 2008. The 2006 Plan had 300,000 shares of common stock reserved for issuance to the Company’s directors, executives, officers, employees, consultants and advisors. Approximately 70,333 shares that were available for award grant purposes under the 2006 Plan have become available for grant under the 2008 Plan following shareholder approval of the 2008 Plan. Options granted under the 2006 Plan could be “non‑statutory stock options” which expire no more than 10 years from the date of grant or “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Upon exercise of non‑statutory stock options, the Company is generally entitled to a tax deduction on the exercise of the option for an amount equal to the excess over the exercise price of the fair market value of the shares at the date of exercise. The Company is generally not entitled to any tax deduction on the exercise of an incentive stock option. As of December 29, 2017, outstanding options granted, net of forfeitures and expirations, under the 2006 Plan consisted of 20,000 shares of incentive stock options.
AMENDED AND RESTATED 2008 PERFORMANCE INCENTIVE PLAN
In March 2008, the Company’s board of directors adopted the 2008 Performance Incentive Plan (“2008 Plan”), and it received stockholder approval at the 2008 annual meeting of the stockholders in June 2008. The 2008 Plan will currently terminate on April 17, 2027. The 2008 Plan initially had 450,000 shares of common stock reserved for issuance (not counting any shares originally available under the 2006 Plan that “poured over.”) At the 2010, 2012, 2016 and 2017 annual meetings of the stockholders, the stockholders approved 350,000, 500,000, 500,000 and 875,000 share increases, respectively, to the 2008 Plan. The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2008 Plan can also be increased by any shares subject to stock options granted under the 2006 Plan and outstanding as of June 9, 2008 which expire, or for any reason are cancelled or terminated, after June 9, 2008 without being exercised. The 2008 Plan currently has 897,000 shares of common stock reserved for issuance.
Awards authorized by the 2008 Plan include stock options, stock appreciation rights, restricted stock, stock bonuses, stock units, performance stock, and other share‑based awards. No participant may be granted an option to purchase more than 300,000 shares in any fiscal year. Options generally may not be granted with exercise prices less than fair market value at the date of grant, with vesting provisions and contractual terms determined by the compensation committee of the board of directors on a grant-by-grant basis, subject to the minimum vesting provisions contained in the 2008 Plan. Options granted under the 2008 Plan may be “nonqualified stock options” or “incentive stock options” as defined in Section 422 of the Internal Revenue Code. The maximum term of each option shall be 10 years. Upon exercise of nonqualified stock options, the Company is generally entitled to a tax deduction on the exercise of the option for an amount equal to the excess over the exercise price of the fair market value of the shares at the date of exercise. The Company is generally not entitled to any tax deduction on the exercise of an incentive stock option. For awards other than stock options, the Company is generally entitled to a tax deduction at the time the award holder recognizes income with respect to the award equal to the amount of compensation income recognized by the award holder. Options and other awards provide for accelerated vesting if there is a change in control (as defined in the 2008 Plan) and the outstanding awards are not substituted or assumed in connection with the transaction. Through December 29, 2017, outstanding awards granted, net of forfeitures and exercises, under the 2008 Plan consisted of 531,000 shares, 639,000 shares and 88,000 shares for incentive stock options, non-statutory stock options and restricted stock grants, respectively.
The fair value of each option is calculated using the Black‑Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based upon historical volatility of “guideline companies” since the length of time the Company’s shares have been publicly traded is equal to the contractual term of the options.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and expected post‑vesting termination behavior is estimated based upon the simplified method. Under this approach, the expected term is presumed to be the mid‑point between the vesting date and the end of the contractual term. The risk‑free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected volatility
|
|
38
|
%
|
-
|
41
|
%
|
39
|
%
|
-
|
41
|
%
|
38
|
%
|
-
|
42
|
%
|
Expected dividends
|
|
|
|
|
0
|
%
|
|
|
|
0
|
%
|
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
|
|
6
|
|
|
|
|
6
|
|
|
|
|
6
|
|
Risk-free rate
|
|
1.86
|
%
|
-
|
2.08
|
%
|
1.2
|
%
|
-
|
1.84
|
%
|
1.33
|
%
|
-
|
1.75
|
%
|
The Company’s restricted stock awards are valued on the closing price of the Company’s common stock on the date of grant and typically vest over a three-year period.
Summary of Stock Option Activity
A summary of option activity under the 2006 Plan and 2008 Plan as of December 29, 2017 and changes during the fiscal years ended December 29, 2017, December 30, 2016 and January 1, 2016 is presented below. The intrinsic value of the fully‑vested options is $9,961,000 based on the Company’s closing stock price of $23.94 on December 29, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
Options
|
|
Price
|
|
Term (Years)
|
|
Outstanding at December 30, 2016
|
|
1,311,000
|
|
$
|
10.15
|
|
6.69
|
|
Granted
|
|
199,000
|
|
|
30.28
|
|
—
|
|
Exercised
|
|
(271,000)
|
|
|
7.02
|
|
—
|
|
Forfeited or expired
|
|
(32,000)
|
|
|
15.65
|
|
—
|
|
Outstanding at December 29, 2017
|
|
1,207,000
|
|
$
|
14.04
|
|
7.02
|
|
Vested at December 29, 2017
|
|
660,000
|
|
$
|
8.84
|
|
5.58
|
|
Exercisable at December 29, 2017
|
|
660,000
|
|
$
|
8.84
|
|
5.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
Options
|
|
Price
|
|
Term (Years)
|
|
Outstanding at January 1, 2016
|
|
964,000
|
|
$
|
7.22
|
|
6.04
|
|
Granted
|
|
440,000
|
|
|
15.28
|
|
—
|
|
Exercised
|
|
(75,000)
|
|
|
4.41
|
|
—
|
|
Forfeited or expired
|
|
(18,000)
|
|
|
9.81
|
|
—
|
|
Outstanding at December 30, 2016
|
|
1,311,000
|
|
$
|
10.15
|
|
6.69
|
|
Vested at December 30, 2016
|
|
658,000
|
|
$
|
6.21
|
|
4.21
|
|
Exercisable at December 30, 2016
|
|
658,000
|
|
$
|
6.21
|
|
4.21
|
|
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
Options
|
|
Price
|
|
Term (Years)
|
|
Outstanding at January 2, 2015
|
|
926,000
|
|
$
|
5.84
|
|
6.44
|
|
Granted
|
|
165,000
|
|
|
12.33
|
|
—
|
|
Exercised
|
|
(103,000)
|
|
|
3.72
|
|
—
|
|
Forfeited or expired
|
|
(24,000)
|
|
|
3.94
|
|
—
|
|
Outstanding at January 1, 2016
|
|
964,000
|
|
$
|
7.22
|
|
6.04
|
|
Vested at January 1, 2016
|
|
624,000
|
|
$
|
5.24
|
|
4.53
|
|
Exercisable at January 1, 2016
|
|
624,000
|
|
$
|
5.24
|
|
4.53
|
|
A summary of the status of the Company’s nonvested options and changes in nonvested options during the fiscal years ended December 29, 2017, December 30, 2016 and January 1, 2016, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
|
|
Options
|
|
Fair Value
|
|
Nonvested at December 30, 2016
|
|
653,000
|
|
$
|
4.75
|
|
Granted
|
|
199,000
|
|
|
12.23
|
|
Vested
|
|
(273,000)
|
|
|
6.68
|
|
Forfeited
|
|
(32,000)
|
|
|
15.65
|
|
Nonvested at December 29, 2017
|
|
547,000
|
|
|
6.43
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
|
|
Options
|
|
Fair Value
|
|
Nonvested at January 1, 2016
|
|
340,000
|
|
$
|
3.77
|
|
Granted
|
|
440,000
|
|
|
6.15
|
|
Vested
|
|
(109,000)
|
|
|
7.82
|
|
Forfeited
|
|
(18,000)
|
|
|
9.81
|
|
Nonvested at December 30, 2016
|
|
653,000
|
|
|
4.75
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
|
|
Options
|
|
Fair Value
|
|
Nonvested at January 2, 2015
|
|
331,000
|
|
$
|
3.37
|
|
Granted
|
|
165,000
|
|
|
4.92
|
|
Vested
|
|
(132,000)
|
|
|
3.67
|
|
Forfeited
|
|
(24,000)
|
|
|
3.94
|
|
Nonvested at January 1, 2016
|
|
340,000
|
|
|
3.77
|
|
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Summary of Restricted Stock Activity
A summary of restricted stock activity under the 2008 Plan as of December 29, 2017 and changes during the fiscal years ended December 29, 2017 and December 30, 2016, is presented below. The intrinsic value of the fully-vested restricted stock is $1,301,000 and $207,000, based on the Company’s average grant date price of $31.53 and $10.89 for fiscal years ended December 29, 2017 and December 30, 2016, respectively.
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Restricted Stock
|
|
Grant Date
Fair Value
|
|
Outstanding at December 30, 2016
|
|
99,000
|
|
$
|
11.37
|
|
Awarded
|
|
28,000
|
|
|
31.53
|
|
Vested
|
|
(40,000)
|
|
|
33.02
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding at December 29, 2017
|
|
87,000
|
|
$
|
17.67
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
38,000
|
|
$
|
11.66
|
|
Awarded
|
|
82,000
|
|
|
10.89
|
|
Vested
|
|
(21,000)
|
|
|
9.89
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding at December 30, 2016
|
|
99,000
|
|
$
|
11.37
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2015
|
|
38,000
|
|
$
|
5.74
|
|
Awarded
|
|
25,000
|
|
|
13.91
|
|
Vested
|
|
(25,000)
|
|
|
5.05
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding at January 1, 2016
|
|
38,000
|
|
$
|
11.66
|
|
The total unrecognized compensation expense related to nonvested stock options was $3,514,000, $3,101,000 and $1,280,000 for the fiscal years ended December 29, 2017, December 30, 2016 and January 1, 2016, respectively. The total unrecognized compensation expense related to restricted stock grants was $1,162,000, $874,000 and $322,000 for the fiscal years ended December 29, 2017, December 30, 2016 and January 1, 2016, respectively. That expense is expected to be recognized over a weighted-average period of 2.14 years. There were no options granted that were immediately vested during the fiscal years ended December 29, 2017, December 30, 2016 and January 1, 2016.
AMENDED AND RESTATED 2006 EMPLOYEE STOCK PURCHASE PLAN
The Company adopted its Amended and Restated 2006 Employee Stock Purchase Plan (“ESPP”) to allow eligible employees the right to purchase shares of common stock, at semi‑annual intervals, with their accumulated payroll deductions. The plan received stockholder approval in June 2006. The Company re‑submitted the plan to its stockholders for post‑IPO approval at the 2007 annual stockholders’ meeting where approval was obtained. The ESPP initially had 300,000 shares of common stock reserved for issuance. At the 2017 annual meeting of the stockholders, the stockholders approved an 825,000 share increase to the ESPP. A total of 1,125,000 shares of the Company’s common stock have been reserved for issuance under the plan.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
The plan has semi‑annual periods beginning on each January 1 and ending on each June 30 and beginning on each July 1 and ending on each December 31. The first offering period commenced on February 10, 2007 and ended on June 30, 2007. Participants make contributions under the plan only by means of payroll deductions each payroll period. The accumulated contributions are applied to the purchase of shares. Shares are purchased under the plan on or as soon as practicable after, the last day of the offering period. The purchase price per share equals 85% of the fair market value of a share on the lesser price of the share on the first day or last day of the offering period.
The Company’s Amended and Restated 2006 Employee Stock Purchase Plan is a compensatory plan. As of December 29, 2017, there were 805,093 shares available for issuance under the plan.
10. DEBT OBLIGATIONS
Debt obligations, excluding obligations under capital leases (see Note 11 “—Commitments—Leases” below), consist of the following:
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
December 30,
|
|
|
|
2017
|
|
2016
|
|
Outstanding borrowings on revolving credit facility
|
|
$
|
2,500,000
|
|
$
|
—
|
|
Outstanding borrowings on delayed draw term loan
|
|
|
—
|
|
|
1,500,000
|
|
Notes payable for 360 Energy Engineers, LLC, bearing interest at 4%, payable in monthly principal and interest installments of $88,752 through November 2017.
|
|
|
—
|
|
|
1,031,000
|
|
Notes payable for Abacus, bearing interest at 4%, payable in monthly principal and interest installments of $54,281 through January 2017.
|
|
|
—
|
|
|
54,000
|
|
Notes payable for insurance, bearing interest at 2.773%, payable in monthly principal and interest installments of $55,868 through October 2016.
|
|
|
—
|
|
|
599,000
|
|
Deferred purchase price for the acquisition of substantially all of the assets of Genesys, bearing interest at 0.650%, payable in monthly principal and interest installments of $191,667 through March 2018.
|
|
|
383,000
|
|
|
2,862,000
|
|
Total debt obligations
|
|
|
2,883,000
|
|
|
6,046,000
|
|
Less current portion
|
|
|
383,000
|
|
|
3,972,000
|
|
Debt obligations, less current portion
|
|
$
|
2,500,000
|
|
$
|
2,074,000
|
|
The following table summarizes the combined principal installments for the Company’s debt obligations, excluding capital leases, over the next five years and beyond, as of December 29, 2017:
|
|
|
|
Fiscal Year:
|
|
|
|
2018
|
|
|
383,000
|
2019
|
|
|
—
|
2020
|
|
|
2,500,000
|
2021
|
|
|
—
|
Thereafter
|
|
|
—
|
|
|
$
|
2,883,000
|
Credit Facility
On March 24, 2014, the Company and its subsidiaries, as guarantors, entered into a credit agreement (as amended, the “Prior Credit Agreement”) with BMO Harris Bank N.A. (“BMO”), that provided for a revolving line of
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
credit of up to $7.5 million, subject to a borrowing base calculation, and a delayed draw term loan facility of up to $3.0 million.
On January 20, 2017, the Company and each of its subsidiaries, as guarantors (the “Guarantors”), entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with BMO, as lender. The Credit Agreement amends and extends the Company’s Prior Credit Agreement.
The Credit Agreement provides for a $35.0 million revolving line of credit, including a $10.0 million standby letter of credit sub-facility, and matures on January 20, 2020. Subject to satisfying certain conditions described in the Credit Agreement, the Company may request that BMO increase the aggregate amount under the revolving line of credit by up to $25.0 million, for a total facility size of $60.0 million; however, BMO is not obligated to do so. Unlike the Prior Credit Agreement, the revolving line of credit is no longer subject to a borrowing
base limitation and the Credit Agreement no longer includes a delayed draw term loan facility.
To finance the acquisitions of Abacus and substantially all of the assets of 360 Energy on January 15, 2015, the Company borrowed $2.0 million under its delayed draw term loan facility pursuant to the Company’s Prior Credit Agreement. On January 20, 2017, the remaining $1.5 million of borrowings outstanding under the delayed draw term loan facility was converted into $1.5 million of borrowings under the revolving credit facility pursuant to the Credit Agreement.
Borrowings under the Credit Agreement bear interest at a rate equal to either, at the Company’s option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5% or one-month London Interbank Offered Rate (“LIBOR”) plus 1% (the “Base Rate”) or (ii) LIBOR, in each case plus an applicable margin ranging from 0.25% to 1.00% with respect to Base Rate borrowings and 1.25% to 2.00% with respect to LIBOR borrowings. The applicable margin will be based upon the consolidated leverage ratio of the Company. The Company will also be required to pay a commitment fee for the unused portion of the revolving line of credit, which will range from 0.20% to 0.35% per annum, and fees on any letters of credit drawn under the facility, which will range from 0.94% to 1.50%, in each case, depending on the Company’s consolidated leverage ratio.
Borrowings under the revolving line of credit are guaranteed by all of the Company’s direct and indirect subsidiaries and secured by substantially all of the Company’s and the Guarantors’ assets.
The Credit Agreement contains customary representations and affirmative covenants, including certain notice and financial reporting requirements. The Credit Agreement also requires compliance with financial covenants that require the Company to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio.
The Credit Agreement includes customary negative covenants, including (i) restrictions on the incurrence of additional indebtedness by the Company or the Guarantors and the incurrence of additional liens on property, (ii) restrictions on permitted acquisitions, including that the total consideration payable for all permitted acquisitions (including potential future earn-out obligations) shall not exceed $20.0 million during the term of the Credit Agreement and the total consideration for any individual permitted acquisition shall not exceed $10.0 million without BMO’s consent, and (iii) limitations on asset sales, mergers and acquisitions. Further, the Credit Agreement limits the payment of future dividends and distributions and share repurchases by the Company; however, the Company is permitted to repurchase up to $8.0 million of shares of common stock under certain conditions, including that, at the time of any such repurchase, (a) the Company is able to meet the financial covenant requirements under the Credit Agreement after giving effect to the share repurchase, (b) the Company has at least $5.0 million of liquidity (unrestricted cash or undrawn availability under the revolving line of credit), and (c) no default exists or would arise under the Credit Agreement after giving effect to such repurchase. In addition, the Credit Agreement includes customary events of default. Upon the occurrence of an event of default, the interest rate will be increased by 2.0%, BMO has the option to make any loans then outstanding under the Credit Agreement immediately due and payable, and BMO is no longer obligated to extend further credit to the Company under the Credit Agreement.
As of December 29, 2017, the Company was in compliance with the financial covenants under the Credit Agreement.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Promissory Notes
To finance the acquisitions of Abacus and substantially all of the assets of 360 Energy, the Company borrowed $2.0 million under its delayed draw term loan facility pursuant to the Prior Credit Agreement. The term loan provided for interest at the LIBOR rate plus an applicable margin ranging between 2.25% and 2.75 and matured on March 24, 2017. Principal on the term loan was payable on the last day of each March, June, September and December in each year. All of the remaining outstanding principal amount was paid on March 24, 2017. The term loan was governed by the terms of the Prior Credit Agreement. The term loan was paid in full on its maturity date of March 24, 2017.
On January 15, 2015, in connection with the completion of the acquisition of Abacus, WES issued promissory notes to Mark Kinzer (the “Kinzer Note”) and Steve Rubbert (the “Rubbert Note” and, together with the Kinzer Note, the “Abacus Notes”). The initial outstanding principal amount of each of the Kinzer Note and the Rubbert Note was $
0.6
million. The Abacus Notes provided for a fixed interest rate of 4% per annum. The Abacus Notes were fully amortizing and payable in equal monthly installments between January 15, 2015 and their January 15, 2017 maturity date. The Abacus Notes contained events of default provisions customary for documents of this nature. Mr. Kinzer and Mr. Rubbert entered into a Subordination Agreement, dated as of January 15, 2015, in favor of BMO, pursuant to which any indebtedness under the Abacus Notes was subordinated to any indebtedness under the Prior Credit Agreement. The Abacus Notes were paid in full on their maturity date of January 15, 2017.
On January 15, 2015, in connection with the completion of the acquisition of substantially all of the assets of 360 Energy, WES issued a promissory note to 360 Energy (the “360 Energy Note”). The initial outstanding principal amount of the 360 Energy Note was $3.0 million. The 360 Energy Note provided for a fixed interest rate of 4% per annum. The 360 Energy Note was fully amortizing and payable in equal monthly installments between January 15, 2015 and its December 31, 2017 maturity date. The 360 Energy Note contained events of default provisions customary for documents of this nature. 360 Energy entered into a Subordination Agreement, dated as of January 15, 2015, in favor of BMO, pursuant to which any indebtedness under the 360 Energy Note was subordinated to any indebtedness under the Prior Credit Agreement. The 360 Energy Note was paid in full on December 26, 2017, before the notes maturity date of December 31, 2017.
Deferred Purchase Price
The Asset Purchase and Merger Agreement for the acquisition of substantially all of the assets of Genesys dated March 4, 2016, included deferred payments to Messrs. Braun and Mineo in the amount of $2.3 million (“Deferred Payments”), each. The Deferred Payments are to be paid in twenty-four (24) equal monthly installments in the amount of $95,834, inclusive of interest at the rate of 0.65% per annum. Payments commenced April 4, 2016 and conclude March 4, 2018. From issuance through December 29, 2017, the Company made payments of $4.2 million
inclusive of interest and, as of December 29, 2017, the aggregate outstanding balance on the Deferred Payments to Messrs. Braun and Mineo was approximately $0.4 million.
Insurance Premiums
The Company has also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies. During the Company’s annual insurance renewals in the fourth quarter of its fiscal year ended December 29, 2017, the Company did not elect to finance its insurance premiums for the upcoming fiscal year. The unpaid balance of the financed premiums totaled $0 and $599,000 for fiscal years ended December 29, 2017 and December 30, 2016, respectively.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
11. COMMITMENTS
Leases
The Company is obligated under capital leases for certain furniture and office equipment that expire at various dates through 2020.
The Company also leases certain office facilities under non‑cancelable operating leases that expire at various dates through 2023.
Future minimum rental payments under capital and non‑cancelable operating leases are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
|
Fiscal year:
|
|
|
|
|
|
|
|
2018
|
|
$
|
301,000
|
|
|
3,076,000
|
|
2019
|
|
|
125,000
|
|
|
2,648,000
|
|
2020
|
|
|
39,000
|
|
|
1,616,000
|
|
2021
|
|
|
—
|
|
|
1,283,000
|
|
2022
|
|
|
—
|
|
|
1,192,000
|
|
2023
|
|
|
—
|
|
|
277,000
|
|
Total future minimum lease payments
|
|
|
465,000
|
|
$
|
10,092,000
|
|
Amount representing interest (at rates ranging from 3.25% to 3.75%)
|
|
|
(16,000)
|
|
|
|
|
Present value of net minimum lease payments under capital leases
|
|
|
449,000
|
|
|
|
|
Less current portion
|
|
|
289,000
|
|
|
|
|
|
|
$
|
160,000
|
|
|
|
|
Rent expense and related charges for common area maintenance for all facility operating leases for fiscal years 2017, 2016 and 2015 was approximately $3,624,000, $3,215,000 and $2,842,000, respectively.
Employee Benefit Plans
The Company has a qualified profit sharing plan pursuant to Code Section 401(a) and qualified cash or deferred arrangement pursuant to Code Section 401(k) covering substantially all employees. Employees may elect to contribute up to 50% of their compensation limited to the amount allowed by tax laws. Company contributions are made solely at the discretion of the Company’s board of directors. The Company made matching contributions of approximately $1,021,000, $900,000 and $777,000 during fiscal years 2017, 2016 and 2015, respectively.
The Company has a discretionary bonus plan for regional managers, division managers and others as determined by the chief executive officer or Company president. Bonuses are awarded if certain financial goals are achieved. The financial goals are not stated in the plan; rather they are judgmentally determined each year. In addition, the board of directors may declare discretionary bonuses to key employees and all employees are eligible for bonuses for outstanding performance. The Company’s compensation committee of the board of directors determines the compensation of the president and chief executive officer and other executive officers. Bonus expense for fiscal years 2017, 2016 and 2015 totaled approximately $3,535,000, $2,709,000 and $1,268,000, respectively, of which approximately $2,687,000 and $2,090,000 is included in accrued liabilities at December 29, 2017 and December 30, 2016, respectively.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Post-Employment Health Benefits
In May 2006, the Company’s board of directors approved providing lifetime health insurance coverage for Win Westfall, the Company’s former chief executive officer and current director, and his spouse and for Linda Heil, the widow of the Company’s former chief executive officer, Dan Heil. These benefits relate to past services provided to the Company. Accordingly, there is no unamortized compensation cost for the benefits.
Included in accrued liabilities in the accompanying consolidated balance sheets related to this obligation is the present value of expected payments for health insurance coverage, $93,000 as of December 29, 2017 and $110,000 as of December 30, 2016.
12. INCOME TAXES
The provision for income taxes is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Current federal taxes
|
|
$
|
635,000
|
|
$
|
1,441,000
|
|
$
|
983,000
|
|
Current state taxes
|
|
|
306,000
|
|
|
402,000
|
|
|
340,000
|
|
Deferred federal taxes
|
|
|
431,000
|
|
|
900,000
|
|
|
1,295,000
|
|
Deferred state taxes
|
|
|
190,000
|
|
|
325,000
|
|
|
464,000
|
|
|
|
$
|
1,562,000
|
|
$
|
3,068,000
|
|
$
|
3,082,000
|
|
The provision for income taxes reconciles to the amounts computed by applying the statutory federal tax rate of 34% to the Company’s income before income taxes. The sources and tax effects of the differences for fiscal years 2017, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Computed “expected” federal income tax expense
|
|
$
|
4,655,000
|
|
$
|
3,865,000
|
|
$
|
2,496,000
|
|
Permanent differences
|
|
|
(61,000)
|
|
|
86,000
|
|
|
90,000
|
|
Stock options and disqualifying dispositions
|
|
|
(1,629,000)
|
|
|
(232,000)
|
|
|
205,000
|
|
Tax Act - federal rate change
|
|
|
(1,277,000)
|
|
|
—
|
|
|
—
|
|
Energy efficient building deduction
|
|
|
—
|
|
|
(912,000)
|
|
|
(281,000)
|
|
Current and deferred state income tax expense, net of federal benefit
|
|
|
287,000
|
|
|
481,000
|
|
|
482,000
|
|
Change in valuation allowances on deferred tax assets
|
|
|
15,000
|
|
|
(1,000)
|
|
|
73,000
|
|
Federal deferred tax adjustments
|
|
|
(441,000)
|
|
|
—
|
|
|
—
|
|
Adjustment for uncertain tax positions
|
|
|
363,000
|
|
|
—
|
|
|
—
|
|
Research and development tax credit
|
|
|
(188,000)
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
(162,000)
|
|
|
(219,000)
|
|
|
17,000
|
|
|
|
$
|
1,562,000
|
|
$
|
3,068,000
|
|
$
|
3,082,000
|
|
Differences between the Company’s effective income tax rate and what would be expected if the federal statutory rate was applied to income before income tax from continuing operations are primarily due to stock options and disqualifying dispositions and the impact of the tax act. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which, among other items, lowered the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of the Tax Act, the Company recorded a one-time decrease in deferred tax expense of $1.3 million for the fiscal quarter ended December 29, 2017 to account for the remeasurement of the Company’s deferred tax assets and liabilities on the enactment date.
The Tax Act also includes provisions that may partially offset the benefit of
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
the tax rate reduction. Based on the Company’s initial assessment of the Tax Act, the Company believes that the most significant impact on its financial statements is the remeasurement of its deferred taxes. Quantifying all of the impacts of the Tax Act however requires significant judgment by management, including the inherent complexities involved in determining the timing of reversals of deferred tax assets and liabilities. Accordingly, the Company will continue to analyze the impacts of the Tax Act and, if necessary, record any further adjustments to deferred tax assets and liabilities in future periods.
Shortly after the Tax Act was enacted, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the application of generally accepted accounting principles in the United States of America, or GAAP, and directing taxpayers to consider the impact of the Tax Act as “provisional” when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law. In accordance with SAB 118, the Company has recognized the provisional tax impacts. Although, the Company does not believe there will be any material adjustments in subsequent reporting periods, the ultimate impact may differ from the provisional amounts, due to, among other things, the limitation on the deductibility of certain executives’ compensation pursuant to Section 162(m) of the Internal Revenue Code, a detailed evaluation of the contractual terms of the Company’s fourth quarter 2017 capital additions to determine whether they qualify for the 100% expensing pursuant to the Tax Act, the significant complexity of the Tax Act and anticipated additional regulatory guidance that may be issued by the Internal Revenue Service (“IRS”) and changes in analysis, interpretations and assumptions the Company has made and actions the Company may take as a result of the Tax Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
December 29,
|
|
December 30,
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Accounts receivable allowance
|
|
$
|
104,000
|
|
$
|
316,000
|
Other accrued liabilities
|
|
|
1,413,000
|
|
|
2,450,000
|
State net operating losses
|
|
|
191,000
|
|
|
109,000
|
Intangible assets
|
|
|
2,466,000
|
|
|
3,268,000
|
Other
|
|
|
1,126,000
|
|
|
671,000
|
|
|
|
5,300,000
|
|
|
6,814,000
|
Valuation allowance
|
|
|
(87,000)
|
|
|
(72,000)
|
Net deferred tax assets
|
|
$
|
5,213,000
|
|
$
|
6,742,000
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
(6,935,000)
|
|
$
|
(7,637,000)
|
Fixed assets
|
|
|
(463,000)
|
|
|
(632,000)
|
Other
|
|
|
(278,000)
|
|
|
(315,000)
|
|
|
|
(7,676,000)
|
|
|
(8,584,000)
|
Net deferred tax liability
|
|
$
|
(2,463,000)
|
|
$
|
(1,842,000)
|
At December 29, 2017, the Company had state operating loss carryovers of $2.7 million. The carryovers expire through 2036.
During each fiscal year, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets. For fiscal years 2017 and 2016,
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
the Company ultimately determined that it was more-likely-than-not that the entire California net operating loss will not be utilized prior to expiration. Significant pieces of objective evidence evaluated included the Company’s history of utilization of California net operating losses in prior years for each of the Company’s subsidiaries, as well as the Company’s forecasted amount of net operating loss utilization for certain members of the combined group. As a result, we recorded a valuation allowance in the amount of $87,000 and $72,000 at the end of fiscal year 2017 and 2016, respectively, related to California net operating losses.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company has elected to early adopt ASU 2016-09 on a prospective basis, which resulted in a decrease to tax expense of approximately $1.6 million for the fiscal year ended December 29, 2017.
During the fiscal year ending December 29, 2017, the Company recorded a liability of $363,000 for uncertain tax positions related to certain deductions and an adjustment to interest accretion for contingent consideration recognized in tax years 2015 and 2016. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 29, 2017, there were unrecognized tax benefits of $363,000. The Company may be subject to examination by the IRS for calendar years 2014 through 2017. The Company may also be subject to examination on certain state and local jurisdictions for the years 2013 through 2017.
13. SEGMENT INFORMATION
The Company has four reporting segments: Energy Efficiency Services, Engineering Services, Public Finance Services and Homeland Security Services. The Energy Efficiency Services segment, which consists of WES, provides energy efficiency consulting services to utilities, state agencies, municipalities, private industry and non-profit organizations. The Engineering Services segment consists of Willdan Engineering, Willdan Infrastructure and Public Agency Resources. The Engineering Services segment offers a broad range of engineering, construction management and planning services to the Company’s public and private sector clients. The Public Finance Services segment, which consists of Willdan Financial Services, provides expertise and support for the various financing techniques employed by public agencies to finance their operations and infrastructure along with the mandated reporting and other requirements associated with these financings. The Homeland Security Services segment, which consists of Willdan Homeland Solutions, provides national preparedness, homeland security consulting, public safety and emergency response services to cities, related municipal service agencies and other entities.
The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. There were no intersegment sales in any of the three fiscal years ended December 29, 2017. Management evaluates the performance of each segment based upon income or loss from operations before income taxes. Certain segment asset information including expenditures for long‑lived assets has not been presented as it is not reported to or reviewed by the chief operating decision maker. In addition, enterprise‑wide service line contract revenue is not included as it is impracticable to report this information for each group of similar services.
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
Financial information with respect to the reportable segments and reconciliation to the amounts reported in the Company’s consolidated financial statements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
|
|
|
Public
|
|
Homeland
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
|
|
Engineering
|
|
Finance
|
|
Security
|
|
Unallocated
|
|
|
|
|
Consolidated
|
|
|
|
Services
|
|
Services
|
|
Services
|
|
Services
|
|
Corporate
|
|
Intersegment
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
199,609,000
|
|
$
|
57,438,000
|
|
$
|
13,307,000
|
|
$
|
2,998,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
273,352,000
|
|
Depreciation and amortization
|
|
|
3,145,000
|
|
|
571,000
|
|
|
192,000
|
|
|
41,000
|
|
|
—
|
|
|
—
|
|
|
3,949,000
|
|
Interest expense
|
|
|
(90,000)
|
|
|
(15,000)
|
|
|
(5,000)
|
|
|
(1,000)
|
|
|
—
|
|
|
—
|
|
|
(111,000)
|
|
Segment profit (loss) before income tax expense
|
|
|
5,589,000
|
|
|
7,688,000
|
|
|
1,417,000
|
|
|
(51,000)
|
|
|
(952,000)
|
|
|
—
|
|
|
13,691,000
|
|
Income tax (benefit) expense
|
|
|
638,000
|
|
|
877,000
|
|
|
162,000
|
|
|
(6,000)
|
|
|
(109,000)
|
|
|
—
|
|
|
1,562,000
|
|
Net income (loss)
|
|
|
4,951,000
|
|
|
6,811,000
|
|
|
1,255,000
|
|
|
(45,000)
|
|
|
(843,000)
|
|
|
—
|
|
|
12,129,000
|
|
Segment assets(1)
|
|
|
65,872,000
|
|
|
13,616,000
|
|
|
5,921,000
|
|
|
1,237,000
|
|
|
74,656,000
|
|
|
(23,130,000)
|
|
|
138,172,000
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
141,888,000
|
|
$
|
52,292,000
|
|
$
|
12,386,000
|
|
$
|
2,375,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
208,941,000
|
|
Depreciation and amortization
|
|
|
2,511,000
|
|
|
466,000
|
|
|
187,000
|
|
|
40,000
|
|
|
—
|
|
|
—
|
|
|
3,204,000
|
|
Interest expense
|
|
|
(163,000)
|
|
|
(12,000)
|
|
|
(3,000)
|
|
|
(1,000)
|
|
|
—
|
|
|
—
|
|
|
(179,000)
|
|
Segment profit (loss) before income tax expense
|
|
|
5,895,000
|
|
|
6,319,000
|
|
|
520,000
|
|
|
48,000
|
|
|
(1,415,000)
|
|
|
—
|
|
|
11,367,000
|
|
Income tax (benefit) expense
|
|
|
1,591,000
|
|
|
1,706,000
|
|
|
140,000
|
|
|
13,000
|
|
|
(382,000)
|
|
|
—
|
|
|
3,068,000
|
|
Net income (loss)
|
|
|
4,304,000
|
|
|
4,614,000
|
|
|
379,000
|
|
|
35,000
|
|
|
(1,033,000)
|
|
|
—
|
|
|
8,299,000
|
|
Segment assets(1)
|
|
|
63,140,000
|
|
|
12,962,000
|
|
|
6,549,000
|
|
|
589,000
|
|
|
48,237,000
|
|
|
(23,130,000)
|
|
|
108,347,000
|
|
Fiscal Year 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
74,123,000
|
|
$
|
45,997,000
|
|
$
|
11,857,000
|
|
$
|
3,126,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
135,103,000
|
|
Depreciation and amortization
|
|
|
1,525,000
|
|
|
359,000
|
|
|
159,000
|
|
|
29,000
|
|
|
—
|
|
|
—
|
|
|
2,072,000
|
|
Interest expense
|
|
|
(194,000)
|
|
|
(10,000)
|
|
|
(2,000)
|
|
|
(1,000)
|
|
|
—
|
|
|
—
|
|
|
(207,000)
|
|
Segment profit before income tax expense
|
|
|
2,499,000
|
|
|
4,666,000
|
|
|
1,148,000
|
|
|
418,000
|
|
|
(1,390,000)
|
|
|
—
|
|
|
7,341,000
|
|
Income tax expense (benefit)
|
|
|
1,049,000
|
|
|
1,959,000
|
|
|
482,000
|
|
|
176,000
|
|
|
(584,000)
|
|
|
—
|
|
|
3,082,000
|
|
Net income
|
|
|
1,450,000
|
|
|
2,707,000
|
|
|
666,000
|
|
|
242,000
|
|
|
(806,000)
|
|
|
—
|
|
|
4,259,000
|
|
Segment assets(1)
|
|
|
34,686,000
|
|
|
13,641,000
|
|
|
5,377,000
|
|
|
894,000
|
|
|
40,877,000
|
|
|
(23,130,000)
|
|
|
72,345,000
|
|
|
(1)
|
|
Segment assets are presented net of intercompany receivables.
|
The following sets forth the assets that are included in Unallocated Corporate as of December 29, 2017, December 30, 2016 and January 1, 2016.
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,654,000
|
|
$
|
22,660,000
|
Accounts Receivable, net
|
|
|
(1,046,000)
|
|
|
(590,000)
|
Prepaid expenses
|
|
|
1,285,000
|
|
|
1,017,000
|
Intercompany receivables
|
|
|
131,667,000
|
|
|
112,837,000
|
Goodwill
|
|
|
2,000
|
|
|
(3,000)
|
Other receivables
|
|
|
1,687,000
|
|
|
55,000
|
Equipment and leasehold improvements, net
|
|
|
1,504,000
|
|
|
1,869,000
|
Investments in subsidiaries
|
|
|
23,130,000
|
|
|
23,130,000
|
Other
|
|
|
438,000
|
|
|
99,000
|
|
|
$
|
206,321,000
|
|
$
|
161,074,000
|
14. CONTINGENCIES
Claims and Lawsuits
The Company is subject to claims and lawsuits from time to time, including those alleging professional errors or omissions that arise in the ordinary course of business against firms that operate in the engineering and consulting
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
professions. The Company carries professional liability insurance, subject to certain deductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is considered probable of a loss.
In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and discloses the amount accrued and an estimate of any reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for the Company’s financial statements not to be misleading. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of the Company’s financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company will disclose the nature of the loss contingencies, together with an estimate of the possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and a reasonable estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be made, an adverse outcome from such proceedings could have a material adverse effect on the Company’s earnings in any given reporting period. However, in the opinion of the Company’s management, after consulting with legal counsel, and taking into account insurance coverage, the ultimate liability related to current outstanding claims and lawsuits is not expected to have a material adverse effect on the Company’s financial statements.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The tables below reflect selected quarterly information for the fiscal years ended December 29, 2017 and December 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 29,
|
|
December 29,
|
|
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
|
|
(in thousands except per share amounts)
|
|
Contract revenue
|
|
$
|
68,351
|
|
$
|
71,833
|
|
$
|
69,007
|
|
$
|
64,161
|
|
Income from operations
|
|
|
1,964
|
|
|
4,563
|
|
|
4,183
|
|
|
2,994
|
|
Income tax (benefit) expense
|
|
|
(673)
|
|
|
1,220
|
|
|
1,292
|
|
|
(277)
|
|
Net income
|
|
|
2,641
|
|
|
3,312
|
|
|
2,886
|
|
|
3,290
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
$
|
0.38
|
|
$
|
0.33
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
0.30
|
|
$
|
0.36
|
|
$
|
0.31
|
|
$
|
0.36
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,281
|
|
|
8,603
|
|
|
8,730
|
|
|
8,689
|
|
Diluted
|
|
|
8,854
|
|
|
9,136
|
|
|
9,248
|
|
|
9,231
|
|
Table of Contents
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT’D
Fiscal Years 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
|
|
April 1,
|
|
July 1,
|
|
September 30,
|
|
December 30,
|
|
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
|
|
(in thousands except per share amounts)
|
|
Contract revenue
|
|
$
|
33,915
|
|
$
|
58,941
|
|
$
|
58,660
|
|
$
|
57,425
|
|
Income from operations
|
|
|
1,838
|
|
|
3,964
|
|
|
3,053
|
|
|
2,689
|
|
Income tax expense
|
|
|
711
|
|
|
731
|
|
|
548
|
|
|
1,078
|
|
Net income
|
|
|
1,078
|
|
|
3,190
|
|
|
2,462
|
|
|
1,569
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
$
|
0.39
|
|
$
|
0.30
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
0.13
|
|
$
|
0.37
|
|
$
|
0.28
|
|
$
|
0.18
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,996
|
|
|
8,207
|
|
|
8,308
|
|
|
8,334
|
|
Diluted
|
|
|
8,244
|
|
|
8,530
|
|
|
8,720
|
|
|
8,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. SUBSEQUENT EVENTS
Subsequent to year end, the Company was notified that its 2016 tax return will be examined by the IRS. The Company has yet to determine the result due to the examination process having not commenced.
On February 9, 2018, Congress extended the Section 179D Energy Efficient Commercial Building Deduction of the Internal Revenue Code, and the Company will record a benefit in the first quarter of fiscal year 2018.
Willdan (NASDAQ:WLDN)
Historical Stock Chart
From Apr 2024 to May 2024
Willdan (NASDAQ:WLDN)
Historical Stock Chart
From May 2023 to May 2024